Abstract revolutions or: if something is new, the old thing must be bad

There is a part of this small, otherwise enjoyable article about the advent of neuroeconomics that bothers me. The premise of the piece is that neuroeconomics is “seeking a physical basis for [economic theory] inside the brain”. This is a field that is certainly sexy and possibly exciting; a while back I argued that it is a field that in some sense rediscovers the absolute primacy of “preferences” as the keystone of economic theory. I said:

The potentially exciting thing about neuroeconomics is that, even allowing for inexactness, it might tell us more about the actual hedonic motivators of people. Ambitious, yes, but not unimaginable. Of course, to an economist who wasn’t under the mistaken impression that simplified preferences are supposed to be realistic, it might just amount to saying “your simplification is a simplification”, which is slightly less exciting news. Or not news at all.

OK. In today’s article, we learn that 

modern economic and financial theory is based on the assumption that people are rational, and thus that they systematically maximize their own happiness, or as economists call it, their “utility.”

Since it’s hard to figure out what is going on in people’s heads, the argument continues, we employed an idea called revealed preference, the reconstruction of unobserved objectives from observed choice. Neuroeconomics, the claim runs, may one day be able to identify brain structures that are associated with various components of choice, and so neatly sidestep the problem of unobservability.

But this is much too much:

While Glimcher and his colleagues have uncovered tantalizing evidence, they have yet to find most of the fundamental brain structures. Maybe that is because such structures simply do not exist, and the whole utility-maximization theory is wrong, or at least in need of fundamental revision.

Utility-maximization theory is wrong. It is wrong by construction, because it is a model, and models are wrong by construction. Why must we go through this? It might be easier to sell me an iPod if you first convince me that CDs are useless, but that’s marketing. Why do we need to market neuroeconomics this way? That tiny little word “wrong” up there is a sin, because it belies the very essence of modeling as a means to make sense of things.

Is it perhaps that what we should understand by the quote is that looking into the brain will tell us that people are not, in some sense, maximizing their hedonic pleasure by the choices they make? This amounts to both an attempt to open the black box called “preferences” and to pin down the (biological?) process by which decisions are actually made. If this is the sense in which utility-maximization will be proved “wrong”, then in the first place it is not clear to me that neuroeconomics can accomplish such a thing. Leaving aside the tricky questions of intent, free will and consciousness, can there be anything inside the black box but another, and another? The leap from the correlates of physical choices in brain activity to the content or existence of a utility function is huge.
But more importantly, even taking literally the notion that we will be able somehow to trap preferences or process in a cage, it is surely impossible that any breadth or depth of evidence on what these preferences are could preclude the need for us to model. What if the thankless treadmill of refining imperfect models of the world could at last be switched off, that there is an apple of knowledge that will free us from the need for models ever again? This is a seductive idea, but it cannot be. To do away with models would be to be as complex as reality, and that is a fight that reality will win every time. 

Experimental philosophy, experimental economics

Interesting article at Prospect Magazine called Philosophy’s Great Experiment, about the rise of ‘experimental philosophy’. Doubly interesting to me, because it could equally well be talking about experimental economics, albeit a few years too late. Or about “neuroeconomics“; the philosophers in the article are using fMRI machines to look for patterns of neuronal activity when subjects are presented with philosophical problems”, just like the researcher who does the same for resource allocation – economics – problems. But here’s the rub:

Some philosophers quietly dismiss the movement as a cynical step by researchers to appear cutting edge and to tap into scientists’ funding.

Indeed, it’s easy to feel this way about the kind of experiments in which economists step on psychologists’ toes. The drive toward empiricism in philosophy that the article talks about seems to be symptomatic of social sciences’ and humanities’ desire to be taken “seriously” as science.
And as we know, that means we need something falsifiable or verifiable. “There is no article in Prospect Magazine called Philosophy’s Great Experiment” is falsifiable, because I can find such an article and falsify the statement. “There is at least one article in Prospect Magazine called Philosophy’s Great Experiment” is verifiable, because I can find such an article and verify the statement. 
In experimental economics, often it seems (at least to this observer) that we’re replicating, or at least mirroring, psychology experiments. Unfortunately, the economics experiment is much less likely to be “scientific”, not because of the method or the issue at hand, but because of the specific question. This is precisely what Lawrence Boland discusses in the paper “On the futility of criticizing the neoclassical maximization hypothesis” (pdf), which I read as a welcome withering put-down to all of those who claim to “disprove rationality“, etc etc. He says:
Properly stated, the neoclassical premise is: ‘For all decision makers there is something they maximize’… The person who assumed the premise is true can respond: ‘You claim you have found a consumer who is not a maximizer but how do you know there is not something which he is maximizing?’

For experimental economists and experimental philosophers alike, the challenge is to pose a scientific question; without that, no method will save us. “Are people ethical?”, for example, is equally a dead end as “are people rational?”. 

What’s next for economics?

Not every scientist is working on a cure for cancer, but it’s surely one of the big open questions in medical science. Does economics have a cure-for-cancer question, one that every economist would sell his soul to answer?
A thought experiment: there’s an economics seminar or lecture about to take place, in an hour, at a location an hour away from you. You hear a rumor about the content of this seminar. What credible rumor would make you jump in the car and high-tail it to the scene?
Again, being that it’s probably foolhardy to speculate on what the next “big idea” might be, this might be an unanswerable question. Nevertheless, if it’s not possible to think of an example, we might have a problem on our hands. Is this question different in economics than in other fields? 
Broadly, there are three things that might qualify. First would be the uncovering of a new piece of evidence, a Dead Sea scrolls-type discovery that would be vital for some purpose or another. What might that be in economics?
Second, and related, would be proving of some unproven result. Whether an unproven provable theory can logically exist in economics is debatable; in theoretical economics, we’re always subject to the underdetermination problem that skews the definition of “proof”; the theories are always logically consistent from within, and nothing is provable from without. In empirical work, we face not just the problem of where the evidence for our groundbreaking proof comes from, but if it is conceivable that the evidence could realistically exist to make such a proof. There a “proof” could rest on clever data collection or a new econometric technique that can interpret the real-world data in a usefully new way. 
Third, we might have some methodological development, perhaps of the kind that saw “information” formally brought into the methodological fold in the 1970s. Whether this could rightly be called a methodological breakthrough is again not clear: is it not just a new application of the existing methodology? 
Could neuroeconomics, partway closing the underdetermination door, do the trick? Will the modeling of complex systems by powerful computers help? All I know is that fewer than 1% of economics seminars are genuinely interesting in and of themselves (that is, apart from the paper and to the terminally curious); what could boost that ratio?

Sensible economic policy is not just found in textbooks

Standard caveat: I remain apolitical here. Hat tip to Economist’s View, whose discussion of Andrew Leonard’s Salon article on some current trade policy touches on a lot of interesting things.

Apparently there’s a “Trade Adjustment Assistance” program on the Senate radar. Now, this could be considered sensible economic policy, whether or not you agree with it.

“The Trade Adjustment Assistance program is designed to compensate manufacturing sector workers who are displaced by trade. It includes financial support for education and training, a health care credit, wage insurance and other goodies.”

It’s a well-worn argument that long-term benefits from trade with other countries might come with short-term costs for those workers who find employment in industries which produce goods most likely to be imported. Social justice might argue for support for such workers; help the worker, not the industry is not an original maxim. It can be applied equally to “dying” industries. If the typewriter industry is becoming obsolete, do you subsidize the typewriter producers or let them die and use your welfare state to support the people who are affected?

Maybe it’s too harsh to say that this is not a textbook argument, but one certainly can’t gloss over the negatives of any policy, no matter how positive the positives, and, recall, those pesky Principles of Economics said that Trade Can Make Everyone Better Off.

The Salon article refers to this, from The Atlantic, makes the forceful and obvious point (I will paraphrase) that a proper welfare state doesn’t ask why, just helps the needy while they need, and that this trade adjustment business is a band-aid, a facsimile of a real solution for the problems of the consequences of harsh and widespread unemployment in whole communities at a time.

Not to wade into the politics where I don’t belong, but I like this:

“Preaching the benefits of free trade without being willing to take care of the “losers” created by trade isn’t very bright in an election year when workers are feeling squeezed, and the opposition party controls Congress.”

Ignoring the electioneering stuff, the direct analog to an economics class or an economic policy debate would be to actually have a proper debate, an acknowledgment that everything isn’t always super-awesome. Similarly, the Economist’s View take:

“It seems to me that an administration that truly cared about the working class would be eager to find a way to help those who are hurt from trade, that they would make it a high priority and insist it get done, but there’s little indication – through actual action – that helping workers hurt from trade, or from economic conditions more generally, is a priority.”

This is perhaps one of the biggest economic policy questions: how big should your welfare state be? Design is one thing, but we have a fundamental philosophical question here, which is bigger than technicalities. Let’s brawl that one out, historically, globally, politically, morally, economically.

Except for poor old John McCain, who gets kicked again. Hard. I’m on record: I think he is an economist (for a suitable definition of economist). Not Economist’s View.

“I think a lot of people are missing the point about John McCain’s lack of knowledge about economics… Anyone who really cared about economic policy and its effect on households would have taken the time to become familiar with the basics. How will he know how best to help workers if he has no idea about the underlying economics? If he asked, there are very prominent economists who would be happy to spend an hour once or twice a week – kind of like a principles course – explaining how the economy operates. But he never bothered, never took the time, because he apparently doesn’t care enough to give up the time necessary to actually understand the polices he is voting on. I wouldn’t mind the ignorance so much if there was any indication at all that he had tried to over come it, any indication he thought it was important enough to learn about, but there isn’t.”

We’re going to give McCain the Principles of Economics course? I just got chills. Surely not the one we give the poor undergraduates? From me:

“A list of “principles” pregnant with loaded statements is not the right way to present our discipline.”

Let’s not indoctrinate John McCain too!

Eternal students

Just in time to miss the question of economics as vocation versus learning for its own sake comes this article from BBC News. “French students shy of the real world”, it says, and the message is that France is a mess because French students are intellectually curious. Perhaps I paraphrase slightly.

France may be a global leader in high technology, but employers complain that today there are far too few students studying science and technology and there are far too many studying “soft subjects” which leaves them ill-prepared to join the real world of work.

I asked a passing student what he wanted to do when he left university. “I want to be an eternal student, ” he said. “Just learning for learning’s sake.”

Fair enough, that might not get a great deal done in the scheme of things, but what a great sentiment. We are, after all, talking about a rich country here. Some young people will surely become scientists and engineers, if that’s what they want. Some other young people will find that a “soft subject” (?) will be the one that stimulates them to want to know and to learn. The luxury afforded to the people who do not struggle to find food to eat or a place to live is to indulge in pursuits like these. We can afford to foster excellence in knowledge and learning, whatever form it may take.

Or we could start a state-run forced labor program.

“But with such poor economic growth and such huge public debt, this country now needs its clever young students to leave the university campus and start ploughing their skills and enthusiasms into the profitable world of work.”

Chills. Why not just set up labor camps and get it over with? Who said anything about “growth” or “profitable”? Didn’t the student just tell you he wants to simply learn? Was it not once the case that universities and learning were valued on their own merits? Can the technical and vocational not coexist with the abstract? I know there exist some non-technical careers out there for which the key requirement is “intelligent”. As an employer, maybe I need scientists, but maybe I need people who are bright and creative and literate.

As I argued yesterday, there are particular implications for a field like economics which is torn between feeling itself purely vocational and purely not. This French debate then mirrors the tension at the heart of the teaching of economics; can it not be OK to pursue this field because it’s interesting?

Then it’s bizarre that it feels like many students take economics courses not because they enjoy them or because they are vocational. 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.

Maybe, maybe not. Maybe there is something down there. But if it’s not intellectual curiosity, a desire to know, then what is it?

Economic systems in action

Here’s a neat article (found via the invaluable Arts and Letters Daily) which is, indirectly, about applied economics. How do you allocate scare places in college classes to a student body?

The article talks about the systems at a few colleges, ranging from sleeping in line to auction systems; the question at hand is “what should we do to allocate these places?”, a nice normative economic question. Wharton’s business school apparently gives students points which they spend in anonymous online auctions to bid for places in courses.

“In other words, Wharton has what may be the most sophisticated, and most confusing, course-registration system ever devised. And, arguably, the fairest. “It’s capitalism gone nuts, but it’s also absolute socialism because everyone is born with the same number of points,” says Justin Wolfers, an assistant professor of business and public policy.”

It’s certainly not “socialist” to give everyone the same number of points: capitalism and socialism are methods of allocating resources, not methods that decide who gets the resources to start with. A socialist system of allocating places would presumably get all the students on campus into a big room and have them decide, which would at least be good fun. I think Wolfers might mean it’s “capitalist but egalitarian”. Equality of opportunity is a different concept from resource allocation.

It’s interesting to see systems of resource allocation go off the deep end: the middle way of just allocating places randomly or having people line up is significantly simpler than either the auction system, or my hypothetical socialist system. How can we make the decision about what system to use? Just like all normative questions, we can’t say which system is “best” or “fairest”, only try to figure out what each system would mean and argue about the rest.

The ends versus means issue in economic systems is an important one. The thought experiment goes like this: if the people’s council knew how a capitalist system would allocate resources, they could choose that allocation. Would that make the socialist system the same as the capitalist system, or is there more invested in the resource allocation mechanism than just the end product? Even figuring out consequences is not enough to answer normative questions.

Here’s the clincher though, about the MIT lottery system:

“The lottery is supposed to be equitable and impersonal, according to Bette K. Davis, office director of the School of Humanities, Arts, and Social Sciences. But that’s not always how it works out. Ms. Davis says that often students who lose the lottery wheedle their way in by talking directly to the professor.”

Capitalist, socialist, anarchist: it’s all about who you know.

Measurement

Just after talking about the euphemistic use of “economy” yesterday, I found an even better one here:

“Nearly all Italians drink bottled water rather than the piped stuff. The industry is worth an estimated 3.2bn euros (£2.38bn) a year to the Italian economy.”

It would be very refreshing if they’d just say “GDP”, since that’s what they mean. That wouldn’t make it any less understandable either, because “economy” is equally vacuous. Let’s play the show and tell game again: what does the quotation mean?

It can’t mean that “if no bottled water was sold, people would spend 3.2bn euros less” – I’m sure they’d find another way to spend it. It can’t mean “worth 3.2bn euros a year to the Italian resource allocation”, because that’s not a sentence. It can’t mean that “Italian workers/producers would get 3.2bn less in wages/payments a year”, because I’m sure that they could do something else besides produce bottled water.

My best guess is “the Italian bottled water industry makes sales worth 3.2bn every year”. Why, oh why, can’t the reporter simply say that? It’s not remotely the same thing as any of the other suggestions I just made, yet I guess they’re all technically possibilities if we read “economy” as “system of production and consumption” or something like that. If I want to be really obnoxious I could ask whether the reporter has measured every consequence of the hypothetical disappearance of the Italian bottled water industry to come up with his figure.

More to the point, let’s forget about the absurdity of the quotation in itself and ask why the “worth” of any effect on the “economy” measured in money? This screams a confusion of metric and quality, a cardinal sin of positive science; even if I could get an accurate figure for the effect of something on “Gross Domestic Product”, I still think “worth” is too loaded a term.

A big chunk of the gulf between theoretical economics and empirical testing of real-world relationships is the metrics we use. Our abstractions work (or can, or should work) in a world where we measure outcomes agnostically: if you care about this. Theoretical economists can play in imaginary worlds all day, exploring the “relationships” between fundamentally unmeasurable things under their assumptions. On the other hand, some imaginary concept like “utility” is singularly useless if we want to actually talk about the real world. Empirical economists must deal with this problem somehow: if you want to talk about the effect of this measurable thing on that measurable thing you must explicitly ignore the intangible (like, perhaps, satisfaction).

Then what conclusions can we draw? This affects that, but not how “good” it is. This is, again, the reason why economics can never be a technocratic prescription of what “should” be done; we simply have no real-world metric to answer the question, and our theoretical metrics are unobservable. It’s the power and beauty of the science – we don’t have the answers. Is someone pretending to? Just for fun, I Googled “what’s wrong with GDP”. When our metrics are the sole determinant of policy, of course the metric – and, by extension, economics – comes under intense attack.

Now that’s all well and good until we get to economics teaching, practice and discussion which ignores this important conclusion. I don’t deny the challenge of constant vigilance to make sure student, reader, researcher know that we’re dealing with only what we can measure, but nothing short of a commitment to acknowledge the limitations of measurement at every turn will be enough to dispel the notion that the science of economics can tell us what to do.

What do you want to happen?

Step one in normative economics is, I think, finding out what you want. Without a goal, positive economics is as useless as a coffee break (unless, of course, your goal was a cup of coffee). Is it odd, then, that economists don’t seem to spend any time figuring out what people want?

Although I’m certainly no authority, it seems to me that psychologists and sociologists spend a lot more time on this question. For example, I recently came across a psychology article with the wonderful title “Not Having What You Want versus Having What You Do Not Want”(here’s a link, but the full text is subscriber-only). I cannot resist quoting the first paragraph:

“No childhood passes without disappointment about a birthday present, no adolescence seems to be complete without a disappointing love affair, and hardly anyone is a stranger to the unpleasant feeling that stems from buying an expensive consumer product that turns out to be less than expected. All in all, a life without disappointment seems rare.”

And they call economics the dismal science… I wish we could be so melancholy. The point, however, is that while behavioral economics might be trying to push the boundary of what the people in economic models care about by incorporating, for example, disappointment, I don’t know of any economics literature that’s trying to figure out what people actually care about.

Of course, it’s difficult. How could we go about it? Economists are very distrustful of surveys as unscientific. One of my favorite normative economics results is hidden in a paper called “Economics of the Endangered Species Act” (link): US household surveys asked people what they’d be willing to pay to save each of a set of endangered species. Scaled up, the answers implied that the US population would be willing to pay one percent of its total income to save two percent of endangered species. It’s a bit of a facetious point, but it’s a neat way of showing that talk is cheap in answering surveys. Simply observing what people do can’t really answer the question either, especially when we’re talking about a bigger scale than the individual level.

Do we assume that democracy will elect leaders who represent the goals and ambitions of the people? I think the whole thing poses a serious problem for any economist bold enough to make a policy recommendation: how has the normative branch of economics tried to figure out what people want?

If someone asked you what you wanted, specifically or generally, for you or for the country, or the world, what might make the list? Money, a job, friends, lovers, health, the environment? How closely will the list match the things inside your head? What if you had to give up one thing on your list to get another? Again, a common recourse in economics is to turn our back on this whole sorry mess and just take the things in which we have relatively high confidence: most people like money to some degree.

No economics paper seems to be complete without the mysterious “welfare analysis”, which is essentially a bolted-on normative exercise attached to a positive, descriptive theory. How valuable is such an exercise if we have simplified the motivation of people in the theory? Obviously the normative “welfare analysis” is equally dependent on the assumptions of our theory as the theory itself. It’s a false dawn that is equally as unsuited to answering the question of “what should be” as positive economics itself: again, if we could come up with the metric that captured the quality of any conceivable thing, the magical normative criteria, we should pack up and start a technocracy.

Yet there is no reason to force the positive and normative analyses into the same box. Expanding the foundations of normative analysis, in particular, to include the hypothetical answer to the question of what people want to happen, can happily be done without affecting the quality of positive theory, whether or not it rests on the same foundations. The economist who claims to evaluate the quality of an outcome fails to see that what he calls normative economics is only as realistic as positive economics: not at all. Real normative economics would spend more time trying to figure out what people really want.

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.