Author: jdc

Happy happy joy joy

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Via the wondrous fark.com comes ‘How Rich People Spend Their Time‘ from the Washington Post – it’s about an article in Science written by a battery of psychologist/economist types, including Daniel Kahneman. Very relevant to the question of what motivates people; my first instinct was to assume that it might reveal what people with the time to do what they want do with their time, if you see what I mean, and while the actual intention of the article is somewhat different it’s still full of fun.

The original article is behind the Science subscriber wall, but via the wonders of institutional access, I can get access to metaphysical nuggets like this:

Schkade and Kahneman noted that, “Nothing in life is quite as important as you think it is while you are thinking about it.”

Perhaps some intriguing fact about human nature; perhaps not. The article goes on to talk about some well-known results in the burgeoning ‘happiness’ literature, like the importance of relative rather than absolute income, and adaption to circumstances. I think a great article about this stuff, for the terminally interested, is Richard Layard’s ‘Happiness and Public Policy’.

But the thing that hooked me on this particular Science article is the following piece of weird:

“In a representative, nationwide sample, people with greater income tend to devote relatively more of their time to work, compulsory nonwork activities (such as shopping and childcare), and active leisure (such as exercise) and less of their time to passive leisure activities (such as watching TV).”

Let me get this straight: richer people work more and buy more stuff, and poor schmucks watch a lot of TV? Stop those presses. The point of the article is well-made (from the the title, ‘would you be happier if you were richer’, right on down), and that is to say that people with higher incomes aren’t necessarily engaging in relatively more ‘fun’; however, there are a bunch of unasked questions. Does ‘TV’=’fun’? Is this really evidence that the rich are wasting their time, or are there other reasons why they endure work to get money?

The happiness literature is desperate to find an answer to the question of whether money buys happiness; an eerie similarity to the oft-(mis?)perceived economists’ equation of money with happiness when modeling people, and surely as deserving of the same retort: we know people care about more than money. The obvious question is, well, obvious. What does motivate people?

The arrogance of economics?

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A while ago I mentioned the mysterious science of “welfare analysis”. It tries to evaluate outcomes or predictions of economic analysis or modeling; the idea is to figure out whether x is “better” than y.

That’s not an easy task; we have to figure out how we’re going to measure things if we’re going to compare them. Unfortunately, the only way to answer the question is to take a position on the motivations of the people who’d be affected by your policy. It’s sometimes said that the noxious euphemism “thinking like an economist” means “taking all consequences into account”; leave aside for a moment the obvious point that that’s not “thinking like an economist”, it’s “thinking properly”, but rather let’s figure out what “thinking like an economist” actually requires.

It often seems to require answering that question of “better”, to require taking a position on how you’re going to evaluate policies. It’s more fundamental than assuming something about a utility function, or whatever it takes to perform welfare analysis, but rather seems to require an acceptance of those nefarious so-called “principles” of economics, an agreement with what constitutes a “better” outcome for society.

Then we’re led into a world in which very few people who self-identify as “economists” profess support for any policy or means or resource allocation that lies outside the capitalism-with-some-government model that is the status quo. Is that because once a person has studied economics, it’s obvious to them that this is “best”? Is it because it’s impossible to succeed in the study of economics if you don’t agree that it’s “best”, because you’re turned off or ridiculed?

Economists run the risk of being seen as arrogant if we pretend to understand what a “better” outcome is. In the small this manifests as our faith in the cipher of “welfare analysis”; in the large it manifests as the homogeneity of belief and thought among economists.

‘Good’ versus ‘bad’ economics

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A peculiar distinction is often made between ‘good’ and ‘bad’ economics when analyzing economic policy. The current hot potato of a gas tax holiday in the US is a case in point – though it might be a trivial issue in the scheme of things, it did provide this absolutely outstanding moment from Hillary Clinton:

“Well I’ll tell you what, I’m not going to put my lot in with economists,” Clinton said, a response in line with some of the populist notes she’s been hitting in recent stump speeches on the gas tax.

There are a couple of things going on here. First, it just shows that declaring opposition to economists is just as popular a political strategy as declaring opposition to ‘business’ or ‘the elite’ or ‘greedy oil companies’. This is almost certainly because ‘economics’ is perceived as being one and the same with these things, an ax wielded by the establishment to crush little people under the wheels of capitalism. Again, true economic analysis is valueless, and is subjective only once we evaluate the outcomes or the processes that would lead to or from one thing or another.

The other point, related, is the implicit invocation of a consensus among ‘economists’. It’s related because it is unambiguously true that the majority of economists evaluate things in a particular way – the subjective part is a collective subjectivity rather than a diversity of opinion. Why is that? Are economists molded into a particular normative stance that evaluates policies or outcomes in a particular way? A significant amount of work has been done on the question of which way the causality runs between studying economics and policy opinions: do economists dislike the gas tax holiday because they’ve studied economics or because people who dislike these kind of policies study economics?

The truth is that it’s very easy to identify what ‘good’ and ‘bad’ economics are, because that label can be attached only to the logical, scientific chain of argument – the positive side – that draws the map from cause to effect. Of course we can argue about the validity of the links in the chain, test our assumptions, look to evidence, but the fact remains that ‘bad’ economics is that which fails to acknowledge the true effects of an action.

By contrast, the normative side cannot be labeled ‘good’ or ‘bad’, because it is only opinion. To argue against a normative stance is to argue against an opinion. This is why it is so dangerous for the ‘Principles of Economics’ to include value-loaded statements; this is why it is so dangerous to have a normative consensus among people who call themselves ‘economists’. When that happens, we risk confusing the normative opinions of these people with a scientific conclusion; it is not.

If a politician was to ignore or lie about the tangible consequences of a policy, that is bad, in the sense of being misleading or untrue. However, if a politician acknowledges the best guess of the consequences, whether they argue for or against the policy is neither bad nor good. Economists would do well to remember that they are part of the second group, not the first. It is fine to point out misinformation, but to argue that ‘economics tells us what to do here’ is to assume that their opinion is good, which is a great sin of arrogance.

When one responds to the gas tax stuff with a line like (from Paul Krugman)

Why doesn’t cutting the gas tax this summer make sense? It’s Econ 101 tax incidence theory…

I’m sure they are really pointing out the tangible consequences of the policy, but the line between the positive and the normative is fuzzed, the value-free analysis becomes loaded with subjectivity. The two must be separated.

"Economics Basics"

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Looking for something quite different (as usual), and found this page, from something called Investopedia, which is entitled “Economics Basics”. It makes me think, more than anything else, of the Telephone game (or Chinese Whispers if you’re British), because it’s one degree removed from everything – one degree removed from correct, one degree removed from stereotypically bad, one degree removed from sensible.

Economics may appear to be the study of complicated tables and charts, statistics and numbers, but, more specifically, it is the study of what constitutes rational human behavior in the endeavor to fulfill needs and wants.

Immediately the lean towards ‘professional’ or investment-bank type economists is obvious: academic economics is emphatically not the study of complicated tables or charts or numbers. Statistics, maybe. But that’s fine, a good way to start, to address the misconception about economics and math-y stuff.

Wait, though: the “study of what constitutes rational human behavior”? That makes zero sense. I don’t really understand what that would mean, let alone how it relates to economics. I don’t know what ‘rational human behavior’ is; no-one does. No economist should say to a person ‘here’s what you should be doing’ (with the exception of policy advising normative economists, for obvious reasons), and indeed they don’t.

As an individual, for example, you face the problem of having only limited resources with which to fulfill your wants and needs, as a result, you must make certain choices with your money. You’ll probably spend part of your money on rent, electricity and food. Then you might use the rest to go to the movies and/or buy a new pair of jeans. Economists are interested in the choices you make, and inquire into why, for instance, you might choose to spend your money on a new DVD player instead of replacing your old TV. They would want to know whether you would still buy a carton of cigarettes if prices increased by $2 per pack.

Snooze. And then we default right back to the ‘economics is money’ thing. Goodness me, but the problem of scarcity informs questions so much more vital than ‘how does this guy spend his money on electronics’. Sure, we’re interested in consumer behavior, but come on, this is Economics Basics! Give me some life. The fruit of the earth, the budget of a government, the precious time of a modern human being, all of these are scarce resources. All of these are used to fulfill wants and needs, and are subject to choices.

To study these things, economics makes the assumption that human beings will aim to fulfill their self-interests. It also assumes that individuals are rational in their efforts to fulfill their unlimited wants and needs. Economics, therefore, is a social science, which examines people behaving according to their self-interests. The definition set out at the turn of the twentieth century by Alfred Marshall, author of “The Principles Of Economics” (1890), reflects the complexity underlying economics: “Thus it is on one side the study of wealth; and on the other, and more important side, a part of the study of man.”

I love that Marshall quotation. It sums up very well the state of the economics art at the time, the discipline spawned by interest in wealth and how it accumulates, perpetuates, moves around. I hate the repeated ‘self-interests’. Delete ‘self-‘ and you’d have a (semantically identical) but more neutral, and more accurate, statement. And again – broken record time – this is misleading on the rationality assumption. We don’t make it because we know what rationality is, because we don’t, or because we believe people are rational, because that’s unknowable, or because we’re grumpy bastards who shout ‘humbug’ at the rich tapestry of life. We make it because we want to try to answer questions that involve the actions of people and groups of people, and we can’t start that unless we breathe life into those actors.

If I ask you how the process of exchange of stuff between people works, do you a) dismiss the question, because people are weird and unpredictable, b) tell a parable about a guy who makes wine and a guy who makes cheese who get together and have wine and cheese, or c) model some people who like some goods and show that they might prefer to trade some of their goods with each other?

Well, b) and c) are the same. They are only the difference between an idea and its mathematical expression. If you say a), you can’t be an inquisitive human being, let alone an economist. Fine, I don’t care about a lot of stuff, especially in economics, but these are questions we can try to answer, and the denunciation of any model of human behavior, implicit in criticisms of this straw-man ‘rationality assumption’ is philistinism and willful ignorance.

I don’t suggest that Investopedia is willfully subverting the course of human intellectual endeavor, though. I just accuse them of being a bit narrow-minded in their Introduction to Economics Basics. I know that “Economics Basics” can’t be complicated or anything, but is this what a whirlwind tour of economics has to look like? But wait: our Introductory Economics courses are exactly the same. Pot, kettle.

What economists do: the one model we use

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Economics is jargon-heavy, like, well, everything. Economists, I can attest, are especially fond of that academic disease of using their jargon in everyday conversation, a kind of subconscious economic imperialism. Nevertheless, there’s a difference between specialist knowledge (with its public face, jargon) and the concepts on which a body of knowledge is built.

How could we distill economics to its base? This is a slightly different goal than defining the principles of economics; here we want to identify the actual applicable results that derive from the principles and recur again and again in the whole discipline. As a first pass at this problem, let’s look at the model we use in economics. That’s model, singular.

Modern economics is built on the formalized statement of the definition of the subject: some entity has objectives, and limited resources with which to achieve them. These become the objective function and the constraints. Now the entity could be anything: a firm, a person, a government, a group of people.

The objective function might be expressed in math, but it doesn’t have to be. It reflects, obviously, the objectives of the entity, and these could be anything, but will typically have to be a simplified version of what an entity really wants or needs. This is one place where the abstraction from reality might have to be made, although we can imagine, as a thought experiment, the omniscient modeler who is not subject to this particular problem.

The constraints can, again, be put into math but doesn’t have to be. It is the expression of scarcity; constraints can reflect anything that poses a challenge to our entity’s achieving its goal. The abstraction is often necessary here, too: time, money, social convention, technology are just some of the possible constraints.

Now this is really a very simple idea, but all economics uses this as its base. We are concerned with the allocation of scarce resources in the quest to satisfy objectives, and this is the model of that. The math angle comes in to make this model give tangible and quantifiable results; we could make arguments without the math, but using it often helps to make things clear. The challenge for the modeler is to write the model cleverly, making simplifications enough to make the problem understandable, but not too many to make it irrelevant.

Theoretical economists are explicitly writing this model, over and over, and the illustrative economic models we present in teaching students use this model exclusively. Empirical economists use it too, not just writing it down, but in subtle ways: perhaps the empiricist can identify a precise moment or situation in which the constraints on a particular entity’s problem changed, offering them a useful opportunity to see how choices change in the face of the discrete change in conditions.

This model gives rise to the marginalist result. It says that our entity will allocate resources to a particular use while the benefit of doing so exceeds the cost of doing so, and that the point at which the entity stops will be characterized by the balance of cost and benefit at that particular point. If the decision was changed slightly in either direction, the results would be less satisfying, either because the cost would exceed the benefit, or because the benefit would exceed the cost. That might sound complicated, but it is a familiar idea from everyday life.

In the jargon, the result is that marginal benefit equals marginal cost in the solution to this model of an entity facing a resource allocation model. That simply means that from the “solution”, there is no change that would be a better result for the objective function. Not to say that the solution is a perfect prediction or description; the solution is to the model, not the actual problem faced by the entity. Perhaps the loaded meaning of the word solution is a hindrance here. Much debate has been staged over the extent of predictive or descriptive accuracy of this economic model.

Where it gets a bit complicated is at the point where we’re unsatisfied with the objectives or constraints we are using in our models. Benefit and cost are pretty easy to think about when our abstraction acknowledges only money, for example, but what if my entity’s objective function included the wellbeing of others, the environment, the amount of time spent in the sun, the quality of life? These assumptions are not just more difficult to incorporate, they are more difficult to interpret.

Where does all this fit in with the themes I’ve touched on before? The debate about rationality, economic man and realism informs directly the objective function. For example, the behavioral school could be characterized as seeking to come up with a more realistic, tractable objective function. The economics-as-money fallacy crops up in both the objective and constraints, yet how we denominate these things doesn’t change the model one bit. The debate about math in economics informs the language in which the model is presented; non-mathematical economists still use the model, even if they don’t write all these components down as mathematical relationships.

This is the model of economics. Two examples to show what’s going on.

First: how would a subsidy on the wage of low-income workers, such as the Earned Income Tax Credit, affect the number of people who work and how much they work? The common treatment of this problem in basic economics is to imagine a person who has a desire for money and for time, and to illustrate the wage subsidy as affecting the constraint, in this case the rate at which our person can earn money by giving up their time to work. We can then ask how this change in the constraint affects the hypothetical best choice of our simple person, and even ask how the person’s relative desire for time and money affect this answer.

Theorists can try to answer this question by investigating the model itself; empiricists might look to the data to try to identify the change in actual choices observed when the subsidy is introduced. [Aside: as it turns out, weird things happen with the EITC during the income range when it’s gradually phased out.]

Second: how would a person choose to react to another person they perceive to be unfair? Our person might have an objective function that includes preference for money and fairness, and their constraint could include the social norms for fairness as well as their money budget. This example is well-studied in experimental economics, where our person can decide to sacrifice some common good in order to punish a person who was greedy.

No matter what field of economics one works in, this is the one model most dominant in all of the work. It is, of course, very flexible (in fact, infinitely flexible, as I argued before), and I have stated it in the most general terms. Nevertheless, when economists argue, it is worth remembering that we all play the same game. It might just be the language, but it is a language that can seem daunting and restrictive to outsiders or students. I don’t believe that is the case: the beauty of this most fundamental model is its simplicity and its malleability. To distill economics into its essence, this is the place to start.

Irrationality again

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I resisted talking about ‘Predictably Irrational’, a book by Dan Ariely, “the Alfred P. Sloan Professor of Behavioral Economics at the MIT Sloan School of Management and director of the eRationality Group at the Media Lab”, when the first wave of columns and reviews appeared about it. I haven’t read it, but it is mining the vein of doing experiments to figure out how people behave.

The title, of course, is not palatable to me. It’s not possible to test rationality. I see why it’s attached to the work that behavioral economists do, but semantically, it’s a real pain. Let me dive right in to this article, direct from MIT News.

“Though Ariely’s book is often compared to the bestseller “Freakonomics”–both certainly share a quirky, hands-on approach to questions of everyday behavior–he says that in fact his research is almost the opposite of that book’s. Those researchers found cases where people’s behavior, even in seemingly irrational contexts, was perfectly rational and followed established economic principles. Ariely’s work, by contrast, shows the consistently irrational ways people behave in situations where traditional economics predicts they would follow a course of rational self-interest.”

Goodness me. Consider the bait taken: what’s ‘traditional economics’ and why is it different from behavioral economics (or are they the same)? What’s an ‘irrational context’? Here’s an example, from the article, of the Ariely book:

“Ariely and his students went around and left six-packs of Coke in randomly selected dorm refrigerators all over campus. When he checked back in a few days, all of the Cokes were gone.

But when he later placed plates of six loose dollar bills in those same refrigerators, not a single bill was missing when he checked back. Even though the value was comparable–and thus the situations were supposed to be equivalent–people responded in opposite ways. Why is that?”

First of all, if I see a plate of loose dollar bills in the refrigerator I’m pretty well out of my comfort zone. Can it be so hard to explain why people don’t take dollars from a plate in a dorm refrigerator? Aside from being a bit silly, it’s the first misperception of economics at work! ‘The value was comparable’. Actually, I’m being unfair: this is worse than the first misperception of economics, because the Coke-dollar game, as reported by the article, is refusing to acknowledge any preferences whatsoever, ignoring, then, the most fundamental building block of modeling in economics. Maybe that’s why it’s ‘not traditional’.

There are other examples in the article, and I’m sure the book is full of interesting experimental results. I can’t get past that title, though, and it, like Freakonomics itself and the cottage industry it spawned, is squarely in the making-economics-look-stupid camp with the Christmas stuff. I’m sure insights from behavioral experiments can be informative beyond the triviality – the Obama advisers come to mind – but the press coverage for this new book has instead reinforced the discipline’s ‘quirkiness’ and furthered, in some small and delightful way, the misunderstanding of economics.

Easy money

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Here are some numbers on average starting salary by college major from the Wall Street Journal. If we want to understand what drives people to study economics, part of the reason must be found here.

So, there’s economics, a proud 4th with a not-too-shabby $43,419. First of all, being that I don’t believe economics is vocational, and that I think we don’t place a very high premium on intellectual excellence in the teaching of economics, this is already, to me, a bit weird.

The easy, and I think true, point to make is that if we do some kind of perceived difficulty/scariness of subject times starting salary, economics will win hands down. If all I care about is cash and how hard my degree will be, I doubt I’m choosing math or engineering over economics. It’s easy money.

For once, I’m going to try to use some economics to talk about this. Labor and skills are scarce resources; salaries for graduates in the hard sciences are understandably high, since these skills are valuable and not so very many people study those subjects. But I see exactly zero reason why economics is different, in that light, from management science or history, for example. Does majoring in economics change your abilities in the same way that studying computer science makes you a better code-writer?

Where are the economists going, anyway? From the article:

Scott Bell, who plans to graduate this year from New York University with a degree in East Asian studies, was looking for a job in financial services or consulting. The 21-year-old was unable to land interviews with major investment banks, despite a strong grade-point average and an internship in the Tokyo office of global management consultancy Bain & Co.

East Asian studies would, in this context, seem to be more valuable than economics in preparing someone for a career in financial services or consulting. Economists seem to be facing stiff competition in the labor market for consulting and banking, and of course they are no more qualified for such jobs than anyone else who is literate and numerate, which might itself be contributing to the premium for economists.

I struggle not to fall back on the familiar signaling story for education. I said this a while ago:

Perhaps economics just looks good, perhaps even because it’s confused with finance or business. Perhaps we, the educators, are complicit in the charade because it brings high enrollments and money. There is no incentive to change the program, even if the core is rotten. It’s like an asset bubble – the value of economics as a major, the value of economics to a university, to economics departments, goes up and up and up, but at the bottom there is nothing.

I strongly recommend this short article, “What jobs do economics majors get?”. Listen to this:

Employers are happy to hire students with undergraduate degrees in Economics. They are often looking for good mathematics skills, good writing skills, ability to use a word processing program such as Word and a spreadsheet program such as Excel. Some jobs require skill in using a statistics program – these are appropriate for people who did well in or liked ECON 3254. Computer programming skills are definitely a plus. Almost any programming language will appeal to most employers, although some have a preference for “C” and “Visual Basic.”

OK, so employers want people who can read, write, do math and use a computer. Statistics is good. Computer programming is awesome. This has nothing to do with economics. And lo:

The important thing to understand about finding a job with an economics degree is that employers are less interested in whether you have a specific skill, like being able to find the intersection of the supply and demand curve, than they are in the package of skills that people with economics degrees have. Secret: most of the skills which people use on the job they learn on the job.

Cool, so all the stuff we teach in undergraduate economics is useless to employers (astonishment!), yet people study economics in record numbers. What’s the disconnect here? Is it really just a house of cards, floating on air? What do we teach economics students to do that other students can’t? What do employers think we teach? Back in the original article, this makes more sense:

A breakdown by industry shows that starting salaries for accounting and finance grads rose by a mere 1.9%, while business-administration and management graduates saw increases of less than 1%. The average offer for computer-science majors, on the other hand, rose 7.9%. Engineering graduates saw an average increase of 5.7%.

I’m not down on economics as a field of study. I think it can be interesting and multidisciplinary and philosophical and relevant and topical. However, it seems sometimes to all to be tailored to these numbers: you can earn big bucks by majoring in economics, and economics classes become just a crappy thing you have to do to get there. Everyone’s happy with the status quo.

Simple arguments complicated by needless econ-jargon

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I’m all for novel arguments, but this one is a classic case of over-complication. The argument belongs to Charles Karelis, and reaches me via this article, called ‘The Sting of Poverty’ (bees feature as an extended metaphor), in the Boston Globe. The topic is relative poverty (in America, implicitly) and why poor people don’t take actions to drag their sorry selves out of poverty. Hold that thought, especially if you see an obvious answer, and let’s go through the Karelis argument, as characterized by the article.

“Compared with the middle class or the wealthy, the poor are disproportionately likely to drop out of school, to have children while in their teens, to abuse drugs, to commit crimes, to not save when extra money comes their way, to not work.

To an economist, this is irrational behavior. It might make sense for a wealthy person to quit his job, or to eschew education or develop a costly drug habit. But a poor person, having little money, would seem to have the strongest incentive to subscribe to the Puritan work ethic, since each dollar earned would be worth more to him than to someone higher on the income scale.”

I don’t think so. For whom is it more costly to do all those naughty, naughty things? For the person with a beautiful job, beautiful house, beautiful spouse or the person with a low wage and low prospects? News: when your labor is worth less money, you have less incentive to work, not the ‘strongest’ incentive to ‘subscribe to the Puritan work ethic.

And while we’re on the subject, ‘to an economist, this is irrational behavior’ is literally offensive to this economist. First of all, please don’t ever use the phrase ‘irrational behavior’. Second, even to the most traditional, boring economist in the room, the motivation for the behavior being described is not difficult to speculate on. I just did, and I didn’t even think that hard.

Continuing:

“It also means, Karelis argues, that at one level economists and poverty experts will have to reconsider scarcity, one of the most basic ideas in economics.

“It’s Econ 101 that’s to blame,” Karelis says. “It’s created this tired, phony debate about what causes poverty.” “

No-one is more depressed about Econ 101 than me, but, yikes, economics is all about scarcity! If there was no scarcity, we can all go home and think about something different instead. I’m always disappointed when someone bashes Econ 101 for the wrong reasons, or bashes some jargon from Econ 101 then uses it anyway.

“The economist’s term for the idea Karelis takes issue with is the law of diminishing marginal utility. In brief, it means the more we have of something, the less any additional unit of that thing means to us. In many cases, Karelis says, diminishing marginal utility certainly does apply: Our seventh ice cream cone will no doubt be less pleasurable than our first. But the logic flips when we are dealing with privation rather than plenty.

If, for example, our car has several dents on it, and then we get one more, we’re far less likely to get that one fixed than if the car was pristine before. If we have a sink full of dishes, the prospect of washing a few of them is much more daunting than if there are only a few in the sink to begin with. Karelis’s name for goods that reduce or salve these sort of burdens is “relievers.””

A couple problems. This is a costs issue again, and the ‘good’ we’re talking about is something like ‘a car with no dents in it’, which you either have or you don’t. Diminishing marginal utility of a non-dent is something too esoteric even for an economist, methinks, and that is not a statement I ever thought I’d write. I’m also struggling very hard not to be facetious about the fact that ‘money’ turns out to be the ‘reliever’. Yes, money is a pretty decent ‘reliever’ of financial hardship!

But then, at last, Karelis actually comes over to the light side:

“Karelis argues that being poor is defined by having to deal with a multitude of problems: One doesn’t have enough money to pay rent or car insurance or credit card bills or day care or sometimes even food. Even if one works hard enough to pay off half of those costs, some fairly imposing ones still remain, which creates a large disincentive to bestir oneself to work at all.

“The core of the problem has not been self-discipline or a lack of opportunity,” Karelis says. “My argument is that the cause of poverty has been poverty.” “

Ah. So it is a cost thing. And there’s one of those simple answers I was holding in my mind from the start: many things conspire to make it difficult for poor people to become rich, not least the fact that the problems pile up. Actually, we call those poverty traps (thanks, Wikipedia!).

What lessons can I take from this exercise? First: don’t mess around talking about people’s motivations and incentives, their ‘utility’ and preferences, when it is not necessary to do so. Maybe it sounds nice and jargon-y, but let’s have a bit of Occam’s Razor and just check if, in fact, it’s just a cost thing. Second: a bee sting or car dent metaphor does not a new economic theory make, especially if your new theory calls for a reconsideration of scarcity(!).

The actual policy prescription Karelis is pushing is to simply give the poor money instead of bending over backwards with possibly more costly benefits-in-kind. The debate there is so involved and long-running that I’m not even going to try to describe it in one sentence, but suffice to say it exists, and of course anyone is welcome to join it. I just wish Karelis didn’t invoke ‘economics’ to make his particular arguments, which are much simpler than they are made out to be, and require no dressing.

Literature or science?

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Here‘s an interesting post from Marginal Revolution, titled “Why are the social sciences backward?”, and concerning (bear with me) an article about a book by Gordon Tullock from 1966. What’s for us there?

First, the question is startling in itself given the scientific method in economics. Are the social sciences backward? Here’s how Bruce Cadwell characterizes Tullock’s position:

Tullock next turns to what he considers to be the real reasons behind the backwardness of the social sciences, which in his view is due to differences in the social organization of natural versus social science. The first difference is the relative absence of applied research: because there is no way to patent applied research in the social sciences (He asks, for example, how does one patent a new sales technique?), little of it is done.

This is clearly very different to the modern use of “applied” as it concerns economics, rather referring to concrete, practical methods that arise from the study of people. If that’s the barometer, then I suppose you’d have to consider modern economics at least a bit backward, since not a great deal of it is concerned with this kind of thing, the closest approximation being the “policy implications” section tacked on to every economics research paper (a frankly baffling phenomenon).

Then again, is a “policy implication” really the equivalent of a “new sales technique”? What Tullock seems to be describing is really one degree more practical than economics ever gets. Again, though, this argument applied to the social sciences seems a bit like the difference between, for example, theoretical physics and engineering (to rely on my layperson’s knowledge of both): could we really argue that the natural sciences are generating these practical advances at a greater rate than the social sciences?

[Cadwell:] Furthermore, the second motive for research, curiosity, is in the social sciences “likely to get distracted to essentially non-scientific ends.” This is because in the social sciences:

[The following is directly from Tullock:]. . . there is a strong possibility of artistic distraction. Literature of all kinds is quite frequently based on careful observation of human beings. A large number of brilliant men led by their curiosity to study their fellow men have produced great literature instead of science.

That’s a particularly interesting one, and gives me pause for thought because I perceive a fundamental and disappointing lack of curiosity in the study of economics. I think Tullock’s point here is badly dated by now, at least for this social science: the economics profession, I am confident in saying, will not tolerate “literature” over science at all, at least not in its peer-reviewed academic journals (book-writing occupies an orbit all its own). A little more light is shed by the Marginal Revolution commentary:

Tullock is responding to Mises and Hayek, who both thought that the social sciences were different because matters of human affairs are more complex and because of the subjective dimension of human choice and expectation.

In that case, Tullock could be considered one of the trailblazers of the positivist revolution that replaced big thought with neutral science. In a sense, the struggle of economics has always been to respond to that complexity and subjectivity by simplifying, abstracting, separating to the lowest common denominator of truth in the system. The ‘backwardness’ Tullock identified is certainly less evident, methodologically and in output, than it was at the time he was writing.

What economists do: theory versus empirics

/ jdc / 1 Comment

Down to dirty work today, as I make the bold claim to start talking about the guts of the economics profession. What are we up to? The first distinction in economics research methodology is ‘theory’ versus ’empirics’. Specialization has gotten to us in a big way here, in that theorists and empiricists don’t really associate at all.

So what’s what? Both methods are trying to attack similar questions – what happens if this changes, how do I achieve this, what is the relationship between these things – but use very different standards of proof. A theoretical ‘proof’ is to create a simplified model of reality to speculate on how the things might be related, while empiricists dig into big datasets to try to find the real-world relationship, the common problem being that things are pretty complicated. When economists talk about “applied economics”, they are using a label for the practice of statistical analysis of data in empirical economics research, so in some sense “applied” is not really an informative word here.

When we actually want to answer questions, say for policy analysis or just because we care, it is obviously smart to draw on diversity and explore the theoretical reasoning behind the relationship you’re interested in as well as whatever suggestive real-world evidence exists. Being that this isn’t what economic research papers do, this isn’t what economists do, though: we all do either one or the other whenever we write a research paper. Every economist is, first and foremost, a theorist or an empiricist (or both, but you see what I mean – they are distinct concepts at all moments).

The problem for empiricists is, in a way, harder than for theorists, because finding meaningful relationships in real data is surprisingly difficult, and assuming something away is a much more technical proposition when you have to kill it in your actual data rather than just in your abstraction. For example, if I see that the airport built a new terminal and that house prices went down, I can certainly argue that one caused the other, but actually proving it is a very different proposition. Econometrics is the branch of economics that tries to develop methods to analyze data where it’s difficult to infer causality. Of course, this problem is common to all statistical analysis, not just economics, and it is surely true that really strong evidence is revealed without fancy techniques.

A lot of economists do “applied economics”. Now this is going to be mostly just an anecdotal claim, but it’s certainly plausible to argue that the things that made economists decide to become economists seldom include a burning desire to trawl through huge datasets and run a bunch of regressions; the questions that can be answered in this way are interesting, sure, but the work itself is not a lot of fun. On top of that, despite the positivist teaching of economics, the proportion of time spent on the empirical methods is very, very small compared to the proportion of economics research that is empirical. Not that this is a bad thing: there isn’t a huge amount you can say about empirical methods before you’re actually in a position to use them (and again: not that much fun), but it might be presenting a drastically skewed picture of what it means to be an economist.

There’s actually a bit of a rift within empirical economics about the role of theory, which is a different matter entirely – I’ll try to paraphrase to the best of my ability. That rift concerns the seed of the empirical test being done – should it be explicitly associated with a theoretical model of the relationship you’re looking for in the data (that’s ‘structuralist’), or should the data be allowed to speak for itself and leave models out of it (‘reduced form’)? Now, the funny thing is that, as we know, it’s possible to write down a self-contained and consistent theoretical model that proves any relationship you want; the value of the model depends entirely on how you judge the value of its own little world. Thus, employing theory as some kind of dual proof while doing empirical work is actually redundant; it can offer some clarification of what you think might be driving the relationship you’ve found in the data, but it’s not especially helpful to say “hey, I found this empirical evidence – and look, the model says the same thing!”.

Which, again, is different from the idea of puzzling out a theoretical idea then trying to find evidence to see if it’s true or not. This kind of thing is actually not incredibly popular, perhaps because of the vastly different worlds theorists and empiricists orbit in – different methods, different seminars, different journals. The paradox is thus that very little empirical economics research actually tests theoretical economic hypotheses. Does each approach lend itself to different questions, never the two to meet, or is it in fact just that we don’t like following on each others’ coattails?

Back to the big point. Let’s say I’m a research economist and I’m thinking of a question like this: “would a national health service be good for the United States?” What I will not end up doing is writing an answer to that question, drawing on the arguments and evidence from a variety of sources. The economist’s role in answering such questions depends on which flavor of economist he is. The theorist might end up asking “how would it change the problem for an individual if they were faced with a national health service rather than the current system?” She might create a little model of a person facing choices between spending their money on health care or on other things, who goes on to interact with an insurance company in one instance or the new health service in the other, and figure out how that person’s choices might plausibly change.

The empiricist might end up asking something like “how does the size of a deductible affect people’s health care spending?”, since this might tell us something about the zero-deductible world of national health care, or “how do wait times affect health outcomes?”. Note that to answer the original question – should the US switch systems – using any kind of data, or indeed any kind of theoretical model, is staggeringly complicated and difficult.

Neither type of economist actually writes about the answer to the big question in their academic research. Instead, they go to the questions that their method might be able to answer, making just one brushstroke on the painting of the argument, and for theorists and empiricists, those questions are very seldom the same.