Easy money

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.

Money. Again.

Stop me if you think that you’ve heard this one before. No preamble:

“But there is a much bigger problem, one that challenges the very foundation of the presumed link between per-capita G.D.P. and economic welfare. That’s the assumption, traditional in economic models, that absolute income levels are the primary determinant of individual well-being.”

It’s déjà vu all over again, as they say. I’ve challenged this before (see here for GDP, here for money and here to hammer the point home), and of course money-centrism remains misconception number one about the practice of economics, especially the type of welfare economics the article is talking about. Again, I can only reiterate that agnosticism over people’s likes and dislikes is a tenet of the practice of economics, and assumption and approximation only serve to make our questions answerable.

Getting off that familiar track, this instance is actually especially fun because it comes from a New York Times article which begins:

“DOES money buy happiness? This week, Senator Byron Dorgan, Democrat of North Dakota, will join a long line of people who have taken serious stabs at trying to answer that thorny question. He will hold a hearing exploring whether traditional economic measures like per-capita income accurately capture people’s sense of well-being.”

Strange how Senators spend their time, really. Surreality aside, Robert Frank, the author of the article, does cite some neat hypotheses on the money issue, so I’ll try to forget the economics equals money lament for a second. The object of investigation is how income inequality affects general wellbeing.

“[surveys find] that when everyone’s income grows at about the same rate, average levels of happiness remain the same. Yet at any given moment, the pattern is that wealthy people are happier, on average, than poor people. Together, these findings suggest that relative income is a much better predictor of well-being than absolute income.”

That’s probably bad news for the Senator. I propose Dorgan’s Razor: to make everyone happy, make each person richer than everyone else. Oh dear. Is that a depressing impossibility result? If everyone had the same income, would we all be miserable because we were all no better off than anyone else? Seems a little extreme. Perhaps that points to the weirdness of the money metric generally.

It’s not all bad news, though:

“Yet in many other categories, greater levels of absolute income clearly promote well-being, even in the richest societies. The economist Benjamin Friedman has found that higher rates of G.D.P. growth are associated with increased levels of social tolerance and public support for the economically disadvantaged. Richer countries also typically have cleaner environments and healthier populations than their poorer counterparts.”

I see this as broadly similar to the importance of economic growth for the poor; whatever the value of GDP or income as a measure of individual wellbeing, it’s surely the case that societies with more resources can simply afford more, in the truest sense. Those societies can afford more social spending, more sacrifice of stuff for environment, more health; the equivalent of poor countries being able to afford more when less people have to break their backs in subsistence farming.

It’s also related to things like the pension “crisis” in aging countries like America, Japan and Britain. The more stuff there is to go round, the less acute the problem of providing “enough” for both the workers and the retired becomes, regardless of how many of each type there are. Further still, it’s related to philanthropy, which this article contorts itself to provide an evolutionary explanation for. Philanthropy on the Gates Foundation scale cannot exist without affluence.

Senator Dorgan should be applauded for asking the question of what the goal of GDP growth really means for the wellbeing of the population. A richer set of goals could well be a good thing; perhaps we would be willing to sacrifice some income for greater equality, a healthier environment or the alleviation of global poverty. It’s important, though, to ask about the value of affluence not just for the individual but on a large scale too.

Economic Imperialism

Is it true that economics is invading the space of other social sciences? The idea of economic imperialism is only admissible if we believe that economics equals money. If we don’t believe that, economic reasoning is one of many ways of answering questions: a map, not a country.

The old textbook definition of economics as the social science of the allocation of scarce resources doesn’t really limit us at all. Gary Becker is perhaps the economist most associated with the idea of economic imperialism; his position is that “the horizons of economics need to be expanded”, but, without being too dramatic, those horizons aren’t as close as they look.

When we see economists pop up in the press, they’re usually talking about unemployment, inflation, growth, all the old ones. Sometimes, when we see an economist talking from over the “horizon”, he looks fully as foolish as possible.

The famous one about Joel Waldfogel’s “deadweight loss of Christmas” is a good example. Let me try to paraphrase: “if people only care about money, Christmas gifts are a big waste of resources because their cash value to the recipient is less than their cost to the giver. Give money instead!”. Logical people subsequently point out that gift giving and gift receiving are two of life’s great pleasures, and economists should go back to the cesspool they crawled from.

A microcosm, if you will, of the “economics as money” problem. The story’s no fun if we actually talk about the “if people only care about money” part; with it, it’s just a fun, throwaway logic game, but without it, it’s a nice excuse to print some combination of “humbug” and “economist”. Who’ll print my story that says “if people care about money, being nice to their relatives, not looking like someone who can’t think of a good gift, and a bunch of other stuff, Christmas gifts are an excellent use of scarce resources to spread satisfaction in our cold, crazy world. Happy Christmas!”.

No-one will print it, of course. At least, not if they want to show me as a stereotypical economist. The trick is that both my story and the one about the deadweight loss of Christmas are equally acceptable applications of positive economic reasoning on the topic “what happens to people’s satisfaction when they give or receive gifts?”. I think my assumptions on the desires of the giver are more realistic, and I think Waldfogel’s story lends itself better to measurement. It’s the same rock and the same hard place: how can we be realistic and accurate at the same time? Not, perhaps, a life or death matter in the Christmas story, but pretty important when we’re making policy-relevant models.

My interpretation of Becker’s ambition is to apply the rational choice paradigm of economics to decisions that are decidedly not financial. I also believe that this doesn’t require us to expand the horizons of the discipline: the horizons of economics are not financial, because applying economic reasoning doesn’t require us to think only about money.

Economics is not about money

“The most common misunderstanding about economics is that it is only about money and commerce.”

The beginning seems like a good place to start, and the beginning of the misperception of economics is surely the popular notion that it’s all about money. Where did that arise?

The quotation is from “What Economics Is Not” by Llewellyn Rockwell. Unfortunately, the essay also says:

“This is a confusion sown by economists themselves, who postulate something called “economic man” who possesses a psychological propensity to always behave in ways that maximize wealth.”

Economics is social science, so we have to include an idea of how people behave. One way we do this is to suppose people have some likes and dislikes that their choices seek to satisfy. We suppose our “economic man” will behave in ways that maximize satisfaction.

That seems better than having “economic man” behave randomly: who could argue that we don’t, in fact, try to make the best of what we have? Our problem is that it’s very difficult to decide what people like or dislike. We know that many things affect the way we feel – a new car, sunshine, helping a stranger, being smiled at – and, of course, no two people are exactly alike.

To make matters worse, how would we even know if our “economic man” is striving to maximize satisfaction if we don’t really know what makes him tick? What a huge philosophical question it is, and what an obstacle for economics to have to work with something so elusive as human satisfaction!

How can we recover? Economists often tried to make life much simpler by assuming that people only cared about wealth. Most people probably care about wealth to some degree, and wealth is, mercifully, more measurable than satisfaction, so this assumption shouldn’t be way off the mark. Sadly, once we use the wealth proxy for satisfaction, our “economic man” looks like Rockwell’s, and the misperception deepens.

Why was it deemed necessary to make the wealth-maximizer assumption? That is a question for another day. So, too, is how “economics” came to mean money, wealth or finance in its popular usage. Economics is to the stock market as physics is to your electricity bill – it’s not unrelated, but it’s a big stretch…