Ideology, politics, economics

Simply excellent paragraph from Free Exchange:

I have trouble with any ideological reading of the economics, because the two (ideology and economics) so rarely fit well together. I don’t want to elect a free-market supporter or an interventionist. I want to elect someone who will carefully consider the issues and determine that here the government ought to assign pollution property rights, while here the government should reduce licensure, and so on. I want, in short, someone with enough intellectual heft to know the difference between good policy and good politics.

This promotes the idea a kind of cipher-wonk as a political leader, which is an interesting idea – do we want ideology-free politicians? – but I think extrapolating the point to economics in general is worthwhile. Ideology and economics really don’t get on, and perhaps a lot of the misuse and misunderstanding of “economics” in political stumping and election coverage is indeed due to that tension, that ideology infests politics more than it can get into economics.

The very concept of positivist economics is precisely what the Free Exchange quotation is invoking when arguing that we should be electing someone who can do a proper analysis – an objective analysis – instead of someone whose prejudices and ideology biases them consistently in one direction or the other, regardless of the evidence.

Laudable? Probably. The sticking point, again, is that pesky word ought, as in “I want to elect someone who will carefully consider the issues and determine that here the government ought to assign pollution property rights, while here the government should reduce licensure, and so on.” Then we’re back to square one: we can elect our wonk, who does an objective analysis before enacting any policy, but at some point we need to figure out which option to take, and all the objective analysis in the world can’t prescribe; again, there’s no such thing as technocratic economics. Surely that makes it impossible to avoid ideology in politics? Surely, also, that’s why sterilizing economics can’t also sterilize economic policy. We can do that economic analysis, but we always have to answer the normative question of what we want if we are to make use of it.

Happiness and behavioral stuff again

Via Arts & Letters Daily (again) comes a wonderful (and long) article by Alan Wolfe for the New Republic: “Hedonic Man, The new economics and the pursuit of happiness.” There’s far, far too much for me to discuss in suitable depth here, but, beyond recommending the article, let me pick out a couple of choice bits.

I wholeheartedly agree with Wolfe when he says:

“The social sciences are not just empirical; they are normative, too. It was precisely the insistent normative preference for market-based social arrangements that turned me against Chicago School economics. Governmental regulation is always sub-optimal, they inevitably maintained. Individual freedom is worth more than social equality. If market logic works for firms, surely it can work for recruiting an army, fighting poverty, or providing kidneys. Non-Chicago economists were subtler about these matters, and at times questioned the reliance on markets; but for the many sons and daughters of Milton Friedman, we are hard-wired to be rational choosers, and any efforts we make to direct the course of our actions collectively are bound to fail. Myself, I do not believe that any of these propositions bring us closer to a good society. Other people feel differently. Democracy requires that we argue out our differences. But democratic debate is not well served by pretending that the empirical findings of a single controversial approach in a single academic discipline contain definitive answers to these questions.”

The presentation of economics as a discipline of study certainly does make it seem like we’ve magically cracked the nut of what is the ‘best’ way to organize a society, and, as I’ve argued before, that’s not just dangerous, it’s a misrepresentation of what good economic science is capable of. One reason why it’s a misrepresentation is the measurement issue at work again: to say ‘best’, we need a metric, and to do that we need to ask what people want, to speculate on their motivations and desires. Of course, as misrepresentations go, it’s a tempting one, because from day one of a Principles of Economics course it’s made again and again and again.

Wolfe’s article is built around the review of two books: Predictably Irrational by Dan Ariely (which I’ve talked about before, much to the author’s chagrin, so I won’t return to it now) and Happiness: A Revolution in Economics by Bruno Frey. ‘Happiness’, as discussed by Wolfe, is concerned with exactly that big question in normative social science, which is: what exactly constitutes a ‘good’ outcome? It’s exactly that question that’s the dangerous misunderstanding within economics, the dangerous belief that we know what’s ‘good’.

Wolfe talks at length about Daniel Kahneman and Amos Tversky, the pioneers of what has become ‘behavioral economics’, and I admit that I share Richard Thaler’s reaction, as reported by Wolfe:

“When I read this paper,” [Thaler] wrote of Kahneman and Tversky’s classic article “Judgment Under Uncertainty,” which appeared in 1974, “I could hardly contain myself.”

He talks further about the supposed ‘revolution’ in economics to account for the kind of behavior documented by Kahneman and Tversky and the whole slew of experiments run by economists since:

“One has to wonder why the revolution in economics failed so badly even before it really got off the ground. Neoclassical economics may in some ways be preferable to what the revolutionaries offer, but it remains a vulnerable approach, stuck in unrealistic assumptions about human behavior and all too complacent about the beneficial equilibria established by markets. Nor can one deny the ingeniousness of the early days of economic psychology, especially the inventive puzzles that Kahneman and Tversky devised. If ever a field were ripe for revolution, it is economics. Yet if these two books are any indication, supply and demand, marginal utility, rational choice, and cost-benefit analysis are not going away. At best, economists will tweak their models a bit to account for some of our odder calculations. More likely, they will simply reiterate their belief that we need not examine the internal mechanisms of utility satisfaction because the price someone is willing to pay for something is really all we need to know.”

Again, though, I offer this as the reason why the ‘revolution’ has ‘failed’: we simply can never say what motivates people, whether a person is “rational” or not. ‘Neoclassical economics’ does not restrict the range of assumptions one can make about human behavior. It is therefore completely resilient to any evidence on how people act in a given situation. That’s not a defense of the approach, it’s a fact. It’s distressing, because my prejudice is definitely to agree that economics is ‘complacent’ about the superiority of markets (again, because we ignore the variety of normative metrics of comparison), and that there’s too much arcana.

We need true normative debate. Look again at what Wolfe says about economics: “it remains a vulnerable approach, stuck in unrealistic assumptions about human behavior and all too complacent about the beneficial equilibria established by markets”. It’s a mistake to conflate this problem – the arrogant assumption that we know what’s ‘best’ – with the neoclassical assumptions on human behavior, because, as I’ve argued repeatedly, the method of scientific economics doesn’t actually assume anything about human behavior, as evidenced by the fact that the ‘behavioral revolution’ is comfortably within the confines of ‘neoclassical economics’.

The real revolution would be quieter, and would say something much more familiar: keep your science separate from your opinion.

Happy happy joy joy

Via the wondrous comes ‘How Rich People Spend Their Time‘ from the Washington Post – it’s about an article in Science written by a battery of psychologist/economist types, including Daniel Kahneman. Very relevant to the question of what motivates people; my first instinct was to assume that it might reveal what people with the time to do what they want do with their time, if you see what I mean, and while the actual intention of the article is somewhat different it’s still full of fun.

The original article is behind the Science subscriber wall, but via the wonders of institutional access, I can get access to metaphysical nuggets like this:

Schkade and Kahneman noted that, “Nothing in life is quite as important as you think it is while you are thinking about it.”

Perhaps some intriguing fact about human nature; perhaps not. The article goes on to talk about some well-known results in the burgeoning ‘happiness’ literature, like the importance of relative rather than absolute income, and adaption to circumstances. I think a great article about this stuff, for the terminally interested, is Richard Layard’s ‘Happiness and Public Policy’.

But the thing that hooked me on this particular Science article is the following piece of weird:

“In a representative, nationwide sample, people with greater income tend to devote relatively more of their time to work, compulsory nonwork activities (such as shopping and childcare), and active leisure (such as exercise) and less of their time to passive leisure activities (such as watching TV).”

Let me get this straight: richer people work more and buy more stuff, and poor schmucks watch a lot of TV? Stop those presses. The point of the article is well-made (from the the title, ‘would you be happier if you were richer’, right on down), and that is to say that people with higher incomes aren’t necessarily engaging in relatively more ‘fun’; however, there are a bunch of unasked questions. Does ‘TV’=’fun’? Is this really evidence that the rich are wasting their time, or are there other reasons why they endure work to get money?

The happiness literature is desperate to find an answer to the question of whether money buys happiness; an eerie similarity to the oft-(mis?)perceived economists’ equation of money with happiness when modeling people, and surely as deserving of the same retort: we know people care about more than money. The obvious question is, well, obvious. What does motivate people?

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.