Category Archives: Economic education and methods

Human Interaction

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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.

Road to Sociology Watch

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One of my more recent ideas is that academic economics is on the road to becoming like academic sociology. That is, it will become increasingly driven by a left-wing agenda. Consider the table of contents for the May 2017 issue of the American Economic Review, which is the “papers and proceedings” issue for the latest annual conference of the American Economics Association.

It includes 11 papers from three sessions on gender, plus 3 other papers with “gender” in the title. It includes 15 papers on inequality. These topics account for over 20 percent of the published session papers.

At leading universities, I can think of several conservative economists, but all of them are around 60 years old or older. In 15 years, not even Chicago will have conservatives teaching economics courses.

I should point out that I have nothing against sociology in principle. In fact, it would do economists some good to think in terms of human interaction rather than focus so much on modeling the autonomous individual. If academic sociology were broader than the study of racial and gender, then economics would have much to gain by incorporating insights from sociology.

College women and the future of economics

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Catherine Rampell writes,

The shrinking of the middle is largely due to a recent rise in the share of women (who also represent a majority of college students) who identify as either liberal or far left. The share of female respondents, but not male respondents, who describe their political views this way was at an all-time high (41.1 percent for women, 28.9 percent for men).

Pointer from Tyler Cowen. Note that this survey is of incoming freshmen and freshwomen.

My hypothesis is that these left-leaning women (and men) use small-community intuition in arriving at their political beliefs. They want the relationship between government and citizen to be one of parent and child. They want to see communal sharing, as if we lived in luck village rather than effort village.

When I went to college, I was on the far left. Those views began to change, in part because taking an economics course shifted my paradigm from small-community intuition to thinking about a complex society in more systemic terms. I am not sure that today’s young leftists will undergo a similar transition.

1. In the systemizer-empathizer dimension, women are more likely than men to lean toward empathizer. Empathizers probably will be less likely to take an economics course, less likely to enjoy an economics course, and less likely to be affected by an economics course.

2. I think that economics courses are going to tilt left and toward empathizers. I have an essay forthcoming in which I suggest that in a few decades economics may turn into a left-wing ideological monoculture comparable to sociology today.

A poem to celebrate decentralized order

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Russ Roberts wrote and produced this 6-1/2 minute video. Once again, his creativity, risk-taking, and use of media are a triumph.

I believe that the challenge that economists face in promoting pro-market views is overcoming small-community intuition. If your mental model of society is that it is a family or a small community, then your intuition will not supply any benefits for markets. I think that in order to appreciate markets, you have to understand three things.

1. If a society were limited to a small, self-contained unit, such as a family or a village, it would necessarily have a primitive economy.

2. The coordination problems in a large-scale society cannot be solved the way that coordination problems can be solved in small-scale society. In small-scale society, direct observation of other people and intuition will get you a long way. That is not true in large-scale society.

3. Prices, competition, and creative destruction are an elegant solution to the economic coordination problem in large-scale society.

The poem emphasizes point (3). That is in some ways the most difficult point to explain. But I think you need to walk people through all three points, and even then they may still not be convinced.

What Drives the Result?

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Douglas L. Campbell writes,

the Glick and Rose estimation strategy implicitly assumes that the end of the cold war had no impact on trade between the East and the West. Several of the Euro countries today, such as the former East Germany, were previously part of the Warsaw Pact. Any increase in trade between Eastern and Western European countries following the end of the cold war would clearly bias the Glick and Rose (2017) results, which naively compare the entire pre-1999 trade history with trade after the introduction of the Euro.

Pointer from Mark Thoma.

Campbell is criticizing a paper that found that the creation of the Euro increased trade by 50 percent. He is suggesting that the result could have been driven by the fall in the Berlin wall, which was not caused by the advent of the Euro. The question “what drives the result?” is one that you should ask about any empirical paper. Sadly, it is rarely disclosed honestly by authors, who may not even be aware of the answer.

Pete Boettke on Economic Methods

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He is saying (at this year’s APEE conference),

From a Buchanan perspective, basic economics can be conveyed in 8 points.
1. Economics is a “science” but not like the physical sciences. Economics is a “philosophical” science and the strictures against scientism offered by Frank Knight and F. A. Hayek should be heeded.

2. Economics is about choice and processes of adjustment, not states of rest. Equilibrium models are only useful when we recognize their limits.

3. Economics is about exchange, not about maximizing. Exchange activity and arbitrage should be the central focus of economic analysis.

4. Economics is about individual actors, not collective entities. Only individuals choose.

5. Economics is about a game played within rules.

6. Economics cannot be studied properly outside of politics. The choices among different rules of the game cannot be ignored.

7. The most important function of economics as a discipline is its didactic role in explaining the principle of spontaneous order.

8. Economic is elementary.

As you know, I prefer not to use the term “science” at all. Instead of “philosophical science,” I would call economics one of the disciplines that studies human behavior.

Also, although “only individuals choose,” people are embedded in culture. Human behavior is influenced by ideas, which come from other humans.

These are minor quibbles. I think that points (2), (3), and (7) are particularly important. But I doubt that we will see much of what Boettke wants in college economic teaching in the next decade. Instead, I predict that academic economics will move very far to the left. That is what I conclude in my forthcoming essay on economic methods.

Biggs’ BIG for Social Security

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Andrew Biggs writes,

Under the plan, Social Security would guarantee that all retirees, regardless of work history or earnings, are lifted out of poverty in old age. Thus, while Social Security currently offers no minimum benefit, a strong minimum benefit would be established at the poverty threshold. Over time, however, the maximumUnder the plan, Social Security would guarantee that all retirees, regardless of work history or earnings, are lifted out of poverty in old age. Thus, while Social Security currently offers no minimum benefit, a strong minimum benefit would be established at the poverty threshold. Over time, however, the maximum Social Security benefit would be reduced so that eventually all retirees would receive essentially the same monthly benefit. Social Security benefit would be reduced so that eventually all retirees would receive essentially the same monthly benefit.

Much of the essay tries to debunk some myths about saving for retirement. Some people, myself included, have bought into “facts” that show that Americans do not save. But Biggs writes,

But recent Census Bureau research that relied on IRS administrative data, which counts IRA and 401(k) withdrawals in whatever form they are made, found that from 1984 to 2007 the percentage of new retirees receiving private retirement-plan benefits doubled and median benefit payouts more than doubled. (This study focused on retired women, but it looked at total household incomes and included male spouses, if present.) Thanks to rising private retirement benefits, real total incomes for the median retiree household rose by 58%. In the CPS, which undercounts private retirement benefits, total household incomes rose by only 21%.

Handle with Cynicism

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The commenter writes,

A cynic might say that people want things produced by others to be free and easy to get, while they also want the things they produce to be expensive and under their tight and exclusive control.

So, government statistics are data collected, analyzed, and published for free, and which many academics find useful.

Meanwhile, we already know that most academics are reluctant to publish all their full data sets and program codes online for everyone to both scrutinize and use. Peer review referees often have to sign all sorts of nondisclosure agreements.

The cynic could be even more cynical and say that the government could get a lot more bang for its public buck if it insisted as a condition of accepting public funding that all research results – data and published papers – be available to the public for free, and that many publicly-funded academics currently calling for more funding of government statistics would resist such a reform if it applied to their own research.

Actually, I think that a lot of economists are unhappy with the way that journals perform their gatekeeping function, and a lot of economists want more transparency. Academic life has powerful inertia (think of the low turnover rate among elite institutions), because academics who have succeeded under a particular set of norms and institutions have both the incentive and the ability to sustain those norms and institutions.

I do not think that most academic economists necessarily prefer that their research be proprietary rather than open. It’s just that those with the opposite preference are fighting inertia. But my impressions are based on reading blogs, and the blogosphere is bound to select for economists who prefer open to proprietary.

The Case for Government Statistics

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Nicholas Eberstadt, Ryan Nunn, Diane Whitmore Schanzenbach, and Michael R. Strain write,

Objective, impartial data collection by federal statistical agencies is vital to informing decisions made by businesses, policy makers, and families. These measurements make it possible to have a productive discussion about the advantages and disadvantages of particular policies, and about the state of the economy. This document demonstrates a portion of the breadth and importance of government statistics to public policy and the economy.

Pointer from Timothy Taylor. who adds his endorsement.

Cynics who have read James Scott would mutter something about making the citizenry more “legible.”

So be it. I think that the private sector also benefits greatly from government statistics.

But are the data any good? Thomas Piketty, Emmanuel Saez, and Gabriel Zucman write,

Macroeconomics relies on national accounts data to study the growth of national income, while the study of inequality relies on individual or household income, survey, and tax data. Ideally all three sets of data should be consistent, but they are not. The total flow of income reported by households in survey or tax data adds up to barely 60% of the national income recorded in the national accounts, with this gap increasing over the past several decades.

Pointer from Mark Thoma.

The authors proceed to use this data to make dramatic pronouncements and to propose major policy changes. This is the sort of move that disturbs Russ Roberts and me. If you know that the data are too inconsistent to be allowed to speak for themselves, and you know that other methods of working with the data might yield very different results, why do you pretend to speak with the voice of divine revelation?

Scientist Affiliation and Motivation to Find Truth

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Dan Kahan writes,

Well, “we all know” that conservatives hold university scientists in contempt for their effemenate [sic], elitist ways & that liberals regard industry scientists as shills. But here’s what GSS says about partisanship & industry vs. university scientists . . . .

He may be fair to liberals, but I do not think that his characterization of conservatives would pass an ideological Turing test.

If I may attempt to speak for those of us on the right, my views would be:

1. When it comes to public relations, industry scientists have an incentive to twist the truth. However, when business decisions are affected by scientific analysis, the incentive leans much more toward aiming for truth.

2. In academics, the incentive is to increase one’s prestige. Aiming for truth is not always the best strategy. In fact, based on my own bitter experience, in economics the best strategy is to surf the latest fads. In my day, it was rational expectations, and I was not on board (pun intended). More recently, we have had behavioral economics, natural experiments, and such. There are probably some current fads that I could willingly join, but not at this stage of my life.

3. In the particular area that most interests Kahan, which is climate change, I trust neither the incentives in industry nor in academics. Obviously, if you work for the coal industry, your incentive is to find low estimates for the environmental impact of carbon dioxide emissions. But if you work in academia and you happen to find low estimates for the environmental impact of carbon dioxide emissions, good luck to you if you hope to win prestige.