More rationality, and a million models

Here is an article on a conversation with Raquel Fernández that I found very interesting. The whole thing is worth reading, but I will quote at length this passage on rationality:

There is a beauty to the models in and of themselves. You assume, for example, that people are rational. I don’t think any really good economist thinks that people are perfectly rational, but, on the other hand, if you want to model people as not rational, all of a sudden it’s not clear what choice you should make. There are a million and one ways to be non-rational; there’s only one way to be rational within the confines of a model. Rationality means one thing: you’re maximizing your welfare subject to constraints. Now, if you say people don’t always maximize, and they’re beset by this and that, then all of a sudden you can have a million models. And that’s a little bit unsatisfactory too.

This is pretty close to my own view. My extra take is that any “irrational” behavior – and so anything that the “million models” generate – can be rationalized, either by revising what we assume that the decision-maker cares about, or by adding constraints on the decision-maker’s ability to choose: the question of rationality is a red herring.

Economics From The Heart

A brief interlude to recommend “Economics From The Heart“, a collection of short Paul Samuelson columns from the 60s through the 90s. Doesn’t look like it’s in print, but you can get it used for cheap on Amazon. It’s entertaining stuff, not just as a document of historical op-ed economics:

Billy Graham’s book on angels sold well, one presumes primarily to non-angels. Intellectuals have a propensity to write books that are read only by intellectuals and therefore do not sell well. This despite the propensity of intellectuals to read books. That is all intellectuals are good for: to read, write and talk about books and ideas.

Dinner party advice for the economist

From The Economist’s Free Exchange blog, comes some dinner party advice, based on Justin Wolfers:

JUSTIN WOLFERS discusses a common problem for the economist bon vivant—people are always asking you what’s going to happen to such and such economic variable. Will the economy go into recession? Will the Federal Reserve raise interest rates? Should I sell my shares in Bear Stearns?

Very true. It’s no fun at all to have to admit to being an economist.

On the Venn diagram of ‘what people think of when they meet someone who introduces themselves as an economist’, macroeconomic stuff (inflation, unemployment) and finance (stocks, commodities, assets) are huge whopping great circles, much bigger than they are on the ‘what economists do’ diagram. Hence the point of this site, I suppose.

Anyway, here’s some advice:

Henceforth, when asked about oil prices, simply throw out some jargon, use phrases like “short-run volatility”, and then suggest that the price in three months’ time, or indeed a year, will be the same as it is today.

I love it.

Dead left

Just a quick note to strongly endorse the excellent article on Naomi Klein’s “The Shock Doctrine”: Dead Left by Jonathan Chait in The New Republic. There’s a long deconstruction of Klein’s argument. He ends with this:

What makes Klein’s thesis so odd, and so awful, is that in fact there is an unlimited supply of raw material, an abundant basis in reality, for the sorts of arguments that she wants to make. The last two decades certainly have seen the global spread of absolutist free-market ideology. Many of the newest adherents of this creed are dictators who have learned that they can harness the riches of capitalism without permitting the freedoms once thought to flow automatically from it. In the United States, the power of labor unions has withered, and prosperity has increasingly come to be defined as gross domestic product or the rise of the stock market, with the actual living standards of the great mass of the population an afterthought. Corporations, which can relocate nearly anywhere around the world, have used their flexibility as a cudgel against workers, who do not enjoy the privileges of mobility. Domestic policy has aggressively sharpened income inequalities, and corporations have enjoyed unfettered influence to a degree not seen in a hundred years. And the president did start a war without paying the slightest bit of attention to the country that he would be left occupying or how its people would react.

All these things are true. And all these things are enormous outrages and significant problems. It’s just that they are not the same outrage or the same problem. And Naomi Klein’s relentless lumping together of all her ideological adversaries in the service of a monocausal theory of the world ultimately renders her analysis perfect nonsense.