Why I see academic economics moving left

Don Boudreaux wonders why I make that prediction, and he offers one possible explanation.

economists’ increasing embrace of empiricism that isn’t solidly rooted in basic microeconomic theory of the sort that can be, and should be, taught to undergraduates. That which can be measured and quantified is that which can be seen. Indeed, to quantify something is, in a real sense, to see something – or at least to see some of that something’s physical manifestations. And yet a chief lesson taught by a sound course in basic economics is that many social phenomena are unseen.

What I need is an explanation for what I see as the current and future drift of economics. The difference between the seen and the unseen has been discussed since Bastiat. It could be true that the greater availability of data and the greater emphasis on empirical work creates a bias toward seeing the benefits of intervention and understating the costs. But that is not one of the explanations I had in mind.

I am thinking primarily in terms of the culture of the academy. Disciplines can easily become dominated by narrow ways of thinking. As of the late 1970s, when I was in graduate school, mathematical optimization and multiple regression crowded out everything else. Soon, rational expectations theory and dynamic stochastic optimization had crowded out any sensible thinking about macroeconomics. As those of you who have read my macro memoir can perhaps appreciate, my experience leads me to believe that incredibly dumb ideas can become dominant in an environment in which a handful of professors effectively control the academic job market in a field.

I actually think that in terms of methods, academic economics is getting more broad-minded and less stupid. The generation that believed that progress comes from solving more difficult math problems and using fancier econometrics is finally giving way to younger economists with less rigid methodological doctrines. But young economists are less interested in the fundamental issues of social organization. They prefer looking at narrower, technical questions. They are happy to write papers that suggest potential policy improvements, without worrying about how the political process conducts itself in practice.

If contemporary America is embroiled in a war between the Concrete class that works with stuff and the Abstract class that works with words, numbers, and computer programs, then economists, like other Academics, will side with the Abstract class. The Abstract class believes that in the natural order of things it ought to be managing and governing. I suspect that young economists today are not going to want to criticize this natural order of things, for fear of being shunned as class traitors.

Posted in Economic education and methods | 4 Comments

The Theory of Mind

I just finished reading The Enigma of Reason by Dan Sperber and Hugo Mercier. They look at the process by which we arrive at reasons for actions. The following thought occurs to me:

You probably assume that understanding your own mind is prior to having a “theory of mind” about other humans. However, it could be the other way around.

Sperber and Mercier do not make this sort of claim. However, I do not think that it is terribly inconsistent with their views.

A theory of mind seeks to explain why agent X performs action A. What I am suggesting is that we arrive at this theory not through introspection but instead by observing action A followed by consequence B repeatedly. After we have seen this happen enough, we develop the insight that perhaps agent X is performing action A in order to achieve consequence B. Call this the basic theory of mind, or at least a theory of what motivates others. Note that we might hold such a basic theory of mind or motivation about animals or even about an inanimate object.

Given that we have a basic theory of mind and that we assume that others have similar basic theory of mind, we can engage in a new form of teaching. If I tell you that I am performing action A in order to achieve consequence B, then you can get the point of performing action A without my having to repeat action A many times.

This explanatory form of teaching is very efficient. With cultural communication so important in humans, we have become very good at explaining to others why we do things. Moreover, explanation and justification are similar functions. We develop the ability to justify to others why we do things.

We are concerned with what others think of what we say and do. As I read Sperber and Mercier, they argue that the natural function of reason is to try to gain respect and approval of others for our actions. I think that Sperber and Mercier do not give enough credit to the role of reasons in making teaching more effective. Imagine telling a child to look both ways before crossing a street without telling the child why they should do so. The child could perform the ritual exactly as directed and then walk right in front of moving car.

But the role of reasons in teaching does not address the enigma to which Sperber and Mercier refer. The enigma is that our reasoning process evolved to be biased rather than optimized to arrive at truth. Their explanation is that our reasoning process evolved as a mechanism to explain and justify our actions to others. The goal of reasoning is not to seek Truth but to defend our status. Biased reasoning is helpful for defending status. Bias is less helpful when we are trying to make decisions, but when we make decisions we are simply adapting our reasoning tool to a less natural context.

Sperber and Mercier make another claim, which is that when we argue with one another, we arrive at more reasonable conclusions than when we reason on our own. They say that this is because when we evaluate our own reasons we lack objectivity. They think we are more objective when we evaluate others’ reasons, so that our evaluations are more reliable. I do not find that persuasive. I think that part of defending our own reasons is attacking our opponents’ reasons, and I believe that we tend to be uncharitable to those who disagree with us. I am more inclined to ascribe the benefit of arguing to exposure to reasoning that we have not considered, rather than to a greater objectivity in hearing others’ points of view than in evaluating one’s own.

If reasoning evolved to justify our actions, then how do we get to a point where we use reasoning to make decisions? I think that the most consistent application of their idea would be to say that when we make decisions we anticipate having to defend our actions. As we go through this mental process, we may decide that some actions are unwise. Anticipating my wife’s reaction should I come home drunk, I stop drinking.

It could be that people with poor self-control have difficulty engaging in this exercise. That is, they either lack the ability to anticipate the reactions of others or they are less sensitive to such anticipated reactions.

It is interesting to note that I have often advised people in the throes of making a decision to imagine explaining that decision to a variety of other people. If you are thinking of quitting your job, imagine explaining that to your family, to close friends, to co-workers, and so on. I have suggested that such an exercise can help to clarify your thoughts.

Anyway, what occurs to me is that we obtain our theory of mind “outside-in” rather than “inside-out.” That is, by observing other people and listening to their reasons, we develop a theory of how our own minds ought to work.

Posted in behavioral economics, books and book reviews, culture | Tagged , | 6 Comments

Podcast on The Three Languages of Politics

with Caleb Brown. I think it covers well a lot of issues in the book.

Posted in Three-Axes Model | 4 Comments

An Introduction to Economics

Economics is the study of human interaction in the production and exchange of goods and services in the context of large-scale societies.

In human interaction, our thoughts affect our behavior. Among all animal species, humans are unique in the extent to which we record information and communicate with one another. Our beliefs, and especially our shared beliefs, vary across cultures and evolve over time. This makes the causal structure in human interaction more complex than that in natural science. We are limited in our ability to predict and control human interaction, including economic behavior.

Economics is focused on human interaction in the production and exchange of goods and services. Political science explores human interaction in the exercise of government power. Sociology explores human interaction in the maintenance of status hierarchies and social norms. Psychology and anthropology explore more fundamental aspects of human interaction, often with a focus on interaction within families or isolated small groups.

Economics is most useful in studying large-scale societies, even though there are some economic concepts that can be applied to just one individual (the so-called “Robinson Crusoe economy”). A large-scale society differs from a family or a small isolated tribe in two important ways. First, it is possible in a large-scale society to have a much higher degree of specialization. Second, in a large-scale society, exchange takes place among people who do not know one another and who do not engage in repeated interactions with one another. To coordinate complex specialization and anonymous exchange, large-scale societies require mechanisms that are not needed in small groups. Economists explore these coordination mechanisms.

Many economists employ a technique in which they set up a simplified version of an economic problem, make some basic assumptions about the goals of individuals, calculate the optimal strategy for each type of individual, and arrive at a mathematical prediction for the outcome. This optimization modeling has come to dominate the research and pedagogy of economics. However, for the purpose of describing human interaction, optimization modeling is rigid, limited, and often misleading. It is best to treat optimization modeling as just one tool of economic analysis, rather than as the essence of economics.

Posted in Economic education and methods | 3 Comments

Thoughts on the new class war

Michael Lind writes,

the theory of the managerial elite explains the present transatlantic social and political crisis. Following World War II, the democracies of the United States and Europe, along with Japan—determined to avoid a return to depression and committed to undercutting communist anti-capitalist propaganda—adopted variants of cross-class settlements, brokered by national governments between national managerial elites and national labor. Following the Cold War, the global business revolution shattered these social compacts. Through the empowerment of multinational corporations and the creation of transnational supply chains, managerial elites disempowered national labor and national governments and transferred political power from national legislatures to executive agencies, transnational bureaucracies, and treaty organizations. Freed from older constraints, the managerial minorities of Western nations have predictably run amok, using their near-monopoly of power and influence in all sectors—private, public, and nonprofit—to enact policies that advantage their members to the detriment of their fellow citizens. Derided and disempowered, large elements of the native working classes in Western democracies have turned to charismatic tribunes of anti-system populism in electoral rebellions against the selfishness and arrogance of managerial elites.

This is a theme of a number of recent essays. In a review of Richard Baldwin’s book on globalization, Christopher Caldwell writes,

But only a tiny fraction of people in any society is equipped to do lucrative brainwork. In all Western societies, the new formula for prosperity is inconsistent with the old formula for democracy.

In the same publication, Angelo M. Codevilla writes,

The 2016 election and its aftermath reflect the distinction, difference, even enmity that has grown exponentially over the past quarter century between America’s ruling class and the rest of the country.

…The government apparatus identifies with the ruling class’s interests, proclivities, and tastes, and almost unanimously with the Democratic Party. As it uses government power to press those interests, proclivities, and tastes upon the ruled, it acts as a partisan state. This party state’s political objective is to delegitimize not so much the politicians who champion the ruled from time to time, but the ruled themselves.

A few remarks.

1. Keep in mind that if a few tens of thousands of votes in key states had come up differently, we would be less interested in essays of this sort.

2. As the authors are aware, the class differences have been simmering for a long time and have been noted by many writers. Lind starts with Galbraith and James Burnham. One could move on to Robert Reich’s “symbol analysts” and David Brooks’ Bobos.

3. I might use the distinction of abstract workers and concrete workers. Concrete workers work with stuff. They are in construction, mining, agriculture, manufacturing, and transportation. They might own small retail and service businesses (think of repair). Abstract workers work with words, numbers, and computer programs. Think of lawyers, accountants, software developers, teachers, and bureaucrats. This abstract-concrete distinction is not a perfect dichotomy (health care, for example, combines a lot of both), but it is useful if we do not get too carried away with it.

4. The status of workers in the concrete sector is threatened in many ways. Outsourcing, machine substitution, ease of firing a non-performer, inefficient firms going out of business, and industries with productivity rising faster than demand all could cause the loss of a concrete sector job.

5. The status of workers in the abstract sector is protected in many ways. A public school teacher or industry regulator need not worry about outsourcing, machine substitution, being fired as a non-performer, having an inefficient employer shut down, or facing a decline in demand. Many abstract workers have protection from having their wages pressured by competition from people who lack their credentials. Workers in the concrete sector believe that their wages can be pressured by competition from people who do not even have citizenship papers.

6. Government and management are mostly abstract functions. So the natural order of things is for the Abstract class to rule over the Concrete class.

7. You have to wonder whether (5) is to some extent a result of (6). That is, maybe the Abstract workers who make the rules have set things up to protect Abstract workers but not Concrete workers. As policy makers rescued the economy from the financial crisis, a lot of Concrete workers lost their homes, but financial executives did not lose their mansions.

8. Lind argues in favor of policies that add protection to workers in the Concrete sector. The libertarian alternative is to provide less protection and government indulgence to workers in the Abstract sector. I do not much care for Lind’s vision. But the libertarian vision is surely a non-starter in reality.

Posted in David Brooks, Politics | Tagged | 19 Comments

Housing Markets with Income Constraints

Alex Tabarrok writes,

owner’s equity in real estate is about to exceed it’s 2006 peak

I get the sense that in the cities most constrained by housing supply, markets are very hot at a price just below, say, $1 million, but somewhat tepid once the price gets above, sa,y $1.3 million. If this is an accurate guess of the shape of demand, it could be explained by income constraints. That is, would-be buyers are willing to bid as much as their income will allow, based on mortgage qualification rules. As prices rise, there is a drop-off in the number of potential buyers who can qualify for a loan.

One sign that this is taking place would be that one can find much better value (say, lower cost per square foot) in houses that are priced too high for most buyers to qualify. The most over-priced homes (with the highest cost per square foot) might be the ones that sell in the range where there are many qualified buyers.

If this story is correct, then the current home price boom will run into income constraints. If the typical young professional household can afford a $1.0 million home but nothing more expensive, then prices are going to stop rising once those households have satisfied their demands.

I think we might see that happen this year. This summer could see the last of the bidding wars.

Posted in Housing and housing finance | 11 Comments

Interesting Sociology

From a Joint Economic Committee Report.

In the early 1970s, nearly seven in ten adults in America were still members of a church or synagogue. While fewer Americans attended religious service regularly, 50 to 57 percent did so at least once per month. Today, just 55 percent of adults are members of a church or synagogue, while just 42 to 44 percent attend religious service at least monthly.

…Between 1970 and the early 2010s, the share of families in large metropolitan areas who lived in middle-income neighborhoods declined from 65 percent to 40 percent. Over that same time period the share of families living in poor neighborhoods rose from 19 percent to 30 percent, and those living in affluent neighborhoods rose from 17 percent to 30 percent.

…Between 1974 and 2015, the share of adults that did any volunteering who reported volunteering for at least 100 hours increased from 28 percent to 34 percent.

Pointer from Timothy Taylor.

Interesting throughout. Some, but not all, of the findings relate to what I have called Narrower, Deeper, Older. That is, people are drifting away from the sort of lowest-common-denominator activities that require a modest commitment of time. Instead, people prefer narrower niche activities in which they become more deeply involved.

If you look at associational life in terms of the broader, shallower associations of 1960, our social capital is going down. But looking at it in terms of the narrower, deeper associations of today, the analysis is more complex.

Posted in culture, Timothy Taylor is my Favorite Blogger | 10 Comments

Fake Sociology

But credible enough to pass peer review, apparently.

The paper states that the penis as a form of “’hegemonic masculinity and cultural construction,’ presented in the ‘essence of the hard-on’,” and even argues that man-made climate change is happening because of “patriarchal power dynamics,” brought on by the conceptual penis.

Story here.

It seems to me that this sort of story deserve comments that consist only of puns. Hard science. Scientific Con sensus. Whatever.

Posted in Economics of Education | 3 Comments

Preach it, brother John

John Cochrane writes,

there is a deep lesson in their style of modeling: Heterogeneity. Misallocation. Dispersion. Inequality. The key lesson is not that “regulation is killing US firms on average.” The US as a whole is doing badly because firms are in the wrong place — misallocation. Each individual firm may feel it’s doing fine. It might consider moving to San Francisco, but say “well, we might be more productive there, but wages are much higher because you have to pay people enough to buy a house, so we wouldn’t make any more money if we were there.” More to the point, a new business who would embody the higher productivity, get workers to move, and put the old unproductive business out of business can’t start.

Macroeconomics and our numbers are designed around the “representative firm” and the “representative worker.” But you are seeing here the macroeconomic effects of microeconomic distortion, and only visible in the amazingly large, widening and persistent differences in productivities, wages, and incomes across areas and companies.

Read the whole post. He discusses two recent papers on the cost of housing supply restrictions. These have gotten a lot of play on other blogs as well. But I emphasize the methodological point. It is very much pro-PSST.

Incidentally, one argument against building more housing that Noah Smith tries to answer is that building more high-quality housing in, say, San Francisco, would simply induce more people to move there. With this “induced demand,” so the argument goes, the cost of living there would not fall. Noah has one response, which is to ask whether the proponents of the argument would go so far as to suggest that destroying housing would lower prices. My alternative response is to say that if “induced demand” is true, then that makes the welfare benefits of more building all the greater.

Posted in Housing and housing finance, PSST and Macro | 13 Comments

Human Interaction

Whereas reason is commonly viewed as a superior means to think better on one’s own, we argue that it is mainly used in our interactions with others. We produce reasons in order to justify our thoughts and actions to others and to produce arguments to convince others to think and act as we suggest. We also use reason to evaluate not so much our own thought as the reasons others produce to justify themselves or convince us.

That is from Hugo Mercier and Dan Sperber, The Enigma of Reason: A New Theory of Human Understanding, a book that I have just started to read.

They call their theory of human reason “interactionist.” They argue that when economists or psychologists find what appear to be errors of human reasoning, we are taking human reason out of its natural context by focusing on individual choice. The authors apparently are going to argue that when human reasoning is used interactively, it works better than one might expect based on looking at the individual capacity to reason.

Regardless of how that argument works out, I think that economists would do well to recognize the interactive nature of human behavior. Treat economics as the study not of autonomous individuals (“human action”) but as the study of humans interacting in the context of production and exchange. Models based on the autonomous individual sometimes work well, but my guess is that once you get beyond the most basic supply and demand story, models become very dependent on the prevailing beliefs, cultural norms, and laws in the society to which one attempts to apply the model.

There is no need for economists to commit to what Deirdre McCloskey derides as the Max U view of human nature. We can instead accommodate the view that man is a cultural animal, and that we learn our habits and beliefs from others.

Taking human beings as social animals subject to various departures from pure rationality, market exchange is still a very defensible mode of human interaction. Markets help to organize large-scale specialization and cooperation. Markets are effective learning mechanisms. If Mercier and Sperber are going to claim that our collective brain works in spite of (and perhaps even because of) the flaws of our individual reason, then I am prepared to claim that the market system is often the best tool for taking advantage of that collective brain.

Posted in books and book reviews, Economic education and methods | Tagged , | 5 Comments