Economics = devil’s advocacy

There’s some low-key furore over in Chicago over the naming of a new research institute after Milton Friedman: here‘s a little background from the New York Times. The real joy in the story comes from the “protest letter” sent to the powers-that-be by a ton of Chicago faculty, and John Cochrane’s double-barreled destruction of said letter.


As usual, academics need to waste two paragraphs before getting to the point, which starts in the first bullet.

If academic writing stopped wasting ink, I’d eat all my hats. The point of the protest seems to be that the signatories don’t want to be associated with the evils of “the neoliberal global order”, “monetization”, “globalized capital”, etc etc, which are apparently inexorably linked to poor ol’ Friedman, and Chicago. Leaving aside the issue of whether naming a research institute after Friedman would invite some kind of new or extra, real or perceived bias to the actual work of that institute, Cochrane makes a stab at devil’s advocacy:

The content of course is worse. There isn’t even an idea here, a concrete proposition about the human condition that one can disagree with, buttress or question with facts. It just slings a bunch of jargon, most of which has a real meaning opposite to the literal. “Global South,” “neoliberal global order,” “the service of globalized capital,” “substitution of monetization for democratization.”

It’s a familiar problem for all economists. Everything we’re perceived to believe in and stand for – whether or not we do – is simply evil, enemy of the environment, the people, democracy(?), happiness, community, the poor. I mean, I’m super sympathetic to the perception that economics has an agenda; as I’ve argued with tedious regularity, the pollution of the beautifully hopeful positivist method by normative judgment – the very sin positivism tried to prevent – is the great tragedy of the teaching of economics, but, by god, when we have to argue against this kind of jargon with no intellectual content, is it any wonder we end up sounding like the frontline warriors of ‘capitalism’?

Can you test rationality?

Is it possible to test if people are rational? I think the answer, practically, is a very short no: if a rational person tries to achieve his most preferred outcome of the ones that are available, we can’t distinguish the rationality or irrationality of his choice from his preferences. That is, if I don’t know what you like, I can’t tell if you did something because you liked it or because you’re “irrational”.

Yet rivers of ink have been spilled trying to “prove” or “disprove” models of rational choice. The most famous study of the type is the “Allais paradox”, discussed here. It says that when you pose different choices to people, their responses to pairs of choices are “inconsistent” with each other because the two choices really represented the same cash outcomes.

Whether you look at the question being asked by this type of work “are people rational?”, or “what do people care about?”, it’s pretty clear that any observation cannot answer either of these without knowledge of the other. In “The Methodology of Positive Economics” (pdf) Milton Friedman made the valid, general point that

“If there is one hypothesis that is consistent with the available evidence, there are always an infinite number that are.”

It just so happens that if we interpret some piece of evidence as being consistent with “people are irrational”, one of the “infinite number” towers above all others: “you guessed the preferences wrong”. There’s nothing wrong with trying to figure out how to better model the decisions of people, but claiming to have proved irrationality is nonsensical.