Common sense versus science

We’ve all seen those faintly ludicrous reports of scientific studies confirming the obvious. Can something be so obvious that it doesn’t qualify as research? Where is the line across which we have to devote po-faced time and valuable cash to figure something out? That’s what I was wondering while reading Benjamin Friedman’s review of “Nudge”, the new Big Idea book (and obviously the one getting the most press, what with the Obama association) from Richard Thaler and Cass Sunstein. It begins:

Yes, there is such a thing as common sense — and thank goodness for that.

So far so good.

Few people will be surprised to learn that the setting in which individuals make decisions often influences the choices they make. How much we eat depends on what’s served on our plate, what foods we pick from the cafeteria line depends on whether the salads or the desserts are placed at eye level, and what magazines we buy depends on which ones are on display at the supermarket checkout line. But the same tendency also affects decisions with more significant consequences: how much families save and how they invest; what kind of mortgage they take out; which medical insurance they choose; what cars they drive. Behavioral economics, a new area of research combining economics and psychology, has repeatedly documented how our apparently free choices are affected by the way options are presented to us.

The knock on behavioral economics as a discipline is that it’s all a bit obvious. Even the things that are supposed to be revelatory are a bit “yeah, we know”; one classic example is the somewhat underwhelming finding that when people know they’re drinking a more expensive wine they like it better than one they know is cheaper. The two obvious questions: are we surprised that people’s enjoyment of a wine is influenced by its price? And is it research worth conducting?

Of course, sometimes “common sense” could be wrong, and the whole point of science is to confirm, reject or quantify phenomena in the world around us. For example, there was a lively debate – is it still ongoing? – about whether “institutions” or health was more important in fostering economic growth; the common sense answer is probably to say, well, neither good infrastructure or good health ever hurt anyone, did they? On the other hand, it would be nice to know, if it was possible, the hierarchy, especially if you really want growth but don’t have an infinite budget to encourage it.

Behavioral economics is asking questions on a different order of magnitude than that, but the same logic is probably applicable, that in that field, as in all in economics, we might sometimes seem to be masters of the obvious – a lot of economics is common sense with a fancy outfit on – but, I guess, someone has to do it.

Noble goals

Talking about growth and development yesterday made me think of the twin institutions that bear the brunt of a decent portion of the anti-growth, anti-capitalist, anti-America, anti-“economics” anger in the world. Those would be the World Bank and the International Monetary Fund (perhaps we could throw the World Trade Organization in too). Remember the Seattle riots around the WTO meeting in 1999? How I sympathize with those who would criticize these institutions, who would debate their goals and their practices. Yet here I go, so help me, to try to raise the defense.

Forget for a moment, if possible, any prejudice for or against these institutions. These were not organizations born of evil purpose. Let’s read along with the part of the Bretton Woods agreement that set up what is commonly known as the World Bank:

“The purposes of the Bank are:

(i) To assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes, including the restoration of economies destroyed or disrupted by war, the reconversion of productive facilities to peacetime needs and the encouragement of the development of productive facilities and resources in less developed countries.

(ii) To promote private foreign investment by means of guarantees or participations in loans and other investments made by private investors; and when private capital is not available on reasonable terms, to supplement private investment by providing, on suitable conditions, finance for productive purposes out of its own capital, funds raised by it and its other resources.

(iii) To promote the long-range balanced growth of international trade and the maintenance of equilibrium in balances of payments by encouraging international investment for the development of the productive resources of members, thereby assisting in raising productivity, the standard of living and conditions of labor in their territories.

(iv) To arrange the loans made or guaranteed by it in relation to international loans through other channels so that the more useful and urgent projects, large and small alike, will be dealt with first.

(v) To conduct its operations with due regard to the effect of international investment on business conditions in the territories of members and, in the immediate post-war years, to assist in bringing about a smooth transition from a wartime to a peacetime economy.”

This reflects both the origins of the Bank as an institution of post-war reconstruction. The World Bank was set up to help nations and people who were in need. Don’t these goals seem kind of noble, or important?

The IMF equivalent:

“The purposes of the International Monetary Fund are:

(i) To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.

(ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.

(iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.

(iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.

(v) To give confidence to members by making the Fund’s resources available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.

(vi) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium. in the international balances of payments of members.”

It’s a triumph of global cooperation that institutions like these exist, with the aims – broadly expressed – of achieving stability, development and prosperity. It’s amazing. Like I said, part of me hates playing devil’s advocate for institutions that are routinely characterized as evil tools of evil people in evil countries, but, if you don’t like these institutions, at least tell me you don’t reject the idea of these institutions.

Yes, we know that these institutions have dropped the ball – to put it mildly – in the past, and that is not an economists versus the world thing, it’s just a fact. Yes, it’s incredibly, astonishingly misguided to put headquarters of these institutions in the capital of America, and all the more unfortunate given the strong feelings that alone arouses. Yes, the balance of power in the World Bank, the IMF, the WTO, hell, the UN too, is probably a mess.

But here’s the rub: I want international cooperation that tries to tame the beast of the global economy, of the complex and difficult problems that arise when everyone in the world interacts while trying to make the best out of what they have. I want to worry about figuring out how to help countries and people who want help, and then giving it. I want to acknowledge that we’re all in this together and that our decisions matter for each other.

We – everyone – are the people who can embrace the ideals that gave us unprecedented international cooperation in the aftermath of a bloody and destructive war, and develop those noble ideals into institutions that work, practically, for everyone. I can only quote the first principle of the World Trade Organization: “The first step is to talk“. If you believe the institutions are sick, let’s cure them rather than let them die.