Economics Reimagined

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This show will record at 5 pm Eastern to accommodate a guest from the UK.

Recovering from another show that fell through for tonight, Mary found the following in The New York Times this morning:

But economists have been acting a lot like intellectual imperialists in the last decade or so. They have been using their tools — mainly the analysis of enormous piles of data to tease out cause and effect — to examine everything from politics to French wine vintages.

David Leonhardt, The Future of Economics Isn’t So Dismal, January 10, 2007, The New York Times

We’re going to simplify wildly here, so economists: go gentle on us in the comment thread.

Economics used to be about markets and predictions: tax rates, interest rates, fiscal policy, monetary policy. In short, about money. But with the advent of behavioral economics, economists began to realize that markets are simply aggregations of human choices, and that to understand these choices — imperfect, often irrational or counterintuitive — is to act as a psychologist. For this insight the economist Amost Tversky and the psychologist Daniel Kahneman won the Nobel Prize together in 2002.

If economics is not necessarily just about money, then, but about human behavior, it can be applied to any number of other fields. In the Times article, brand-new economist Emily Oster applied her talent to the field of AIDS research to solve a problem that epidemiologists couldn’t. Oster is one of many, a generation of economists looking for new fields to conquer.

To make this concrete on a personal level, a good friend of mine says the most valuable thing he learned in college was the economic idea of a sunk cost: if you can’t get back what you’ve already put in, it shouldn’t have any bearing on any future decisions. It’s a good concept to have on hand, he reasons, when you’re considering leaving a partner. Or a job.

What can we learn when we use economics to understand not just markets, but ourselves? Where else is economics shedding light? And what profoundly personal problems do you wish you had a bright young economist on call to solve?

Diane Coyle

Economist

Author, The Soulful Science

Stefano DellaVigna

Assistant Professor of Economics, University of California, Berkeley

Author, Does Movie Violence Increase Violent Crime? (pdf)

Jesse Rothstein

Assistant Professor of Economics and Public Affairs, Princeton University

Author, College Performance Predictions and the SAT

Justin Wolfers

Assistant Professor of Business and Public Policy, The Wharton School at the University of Pennsylvania

Extra Credit Reading

David Leonhardt, The Future of Economics Isn’t So Dismal, The New York Times, January 10, 2007: “Economists have been acting a lot like intellectual imperialists in the last decade or so. They have been using their tools — mainly the analysis of enormous piles of data to tease out cause and effect — to examine everything from politics to French wine vintages.”

Tim Harford, The Undercover Economist: The great giveaway, Financial Times, October 6, 2004: “Selfishness is one of those issues where economists seem to see the world differently. It is not that economists are incapable of imagining – or even modelling – altruism. They can, but they usually don’t. And there is a good reason for that: people aren’t selfless.”

Stephen J. Dubner, The Economist of Odd Questions: Inside the Astonishingly Curious Mind of Stephen D. Levitt, The New York Times Magazine, 2003: “In Levitt’s view, economics is a science with excellent tools for gaining answers but a serious shortage of interesting questions. His particular gift is the ability to ask such questions. For instance: If drug dealers make so much money, why do they still live with their mothers?”

Jon E. Hilsenrath and Rafael Gerena-Morales, How Much Does a Neighborhood Affect the Poor?, The Wall Street Journal, December 28, 2006: “Overall, he says, it’s better to move people than leave them in giant housing projects with high concentrations of poverty, one reason HUD has been demolishing public housing. But to make moves successful, scholars say, more counseling and support of those uprooted might help.”

Greg Mankiw, Rising Stars, Greg Mankiw’s Blog, January 10, 2006. [Good stuff on the comment thread.]

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  • Sutter

    Great topic, and I hope you’ll find time to discuss the contributions that Mancur Olson and Kenneth Arrow and others made to the study of political power through the application of economics to political action (“public choice theory”).

    This might be too much for one show, but there are also many ways in which the influence has run the other way — i.e., cases in which economic analysis has been improved by the application of other disciplines, including cognitive psychology and anthropology. These other disciplines have helped economists to understand why individuals do not always act in the simple welfare-maximizing fashion predicted and presumed by classical economics.

  • As an avid Celtics fan, the most interesting example of economic analysis applied to a new sphere is David J. Berri’s work redefining the concept of what makes a valuable player in sports – particularly basketball. Berri’s book, “The Wages of Wins” was reviewed by Malcolm Gladwell last summer in the New Yorker and caused quite a stir because of Berri’s contention that perennial all-star Allen Iverson was actually not a very valuable player (at least if you care about winning). If only the owners of the Celtics would surf over to Berri’s site, the Wages of Wins Journal (http://dberri.wordpress.com/), get the religion, and FIRE GM Danny Ainge’s sorry ass!

  • nother

    My favorite economic principle, one that I use all the time, is Cost/Benefit ratio. I only wish our government would use it as well.

  • nother

    Don’t forget about Opportunity cost, try to factor that into the cost of Iraq.

  • Economics used to be about markets and predictions: tax rates, interest rates, fiscal policy, monetary policy. In short, about money.

    And before that, economics used to be about full-employment and the greater public good.

    Sutter, you beat me too it. I was going to mention public choice theory, too. I remember taking economic classes in the early 80s in a rather left-leaning department and sprinkling these with a few on econometrics. Then in my final year I enrolled in a course on public choice theory and was surprised to find public issues examined through the lens of positivistic consumerism. I couldn’t then and still can’t understand how social issues could be viewed so reductively.

  • Igor

    So now economics is a paragon of science? Since when? These guys can’t even agree whether current deficits/tax cuts are right or wrong and now they are going to advise on marital matters? Talk about hubris…

  • econonimcs is a passion of mine. I just got out of the car where I was surprised to hear this topc being discussed. But I have to host a group now, so I can’t participate. I’ll listen later and hope we keep the topic alive.

    I would like to hear how these new studies are going over with members of government. Can they use this data to redifine how we talk about our economy and determine what we want to work toward? Can the national dialogue about economy become about quality of life rather than quantity of sales?

  • One notable thing that came out in a cast-aside comment made by Ms. Coyle. She noted that sociology and anthropology had previously addressed some of these topics that behavioral economists are now addressing. The critical difference was that “now it’s being done with science.”

    This may demonstrate an extremely impoverished view of science. At the very least, science (whether social or natural) seeks to explain the phenomena of life based upon observable regularities with understandable priors and consequences. Max Weber, in his writings on the philosophy of social science, reminded us that the world is a place with material and ideational causes.

    Traditionally, economists of the last half century have had a set of hammers (price theory and econometric analysis), and the whole world has looked like a nail. However, some of the things that happen in the world can’t be banged upon but may need to be twisted. As a result of having some very powerful hammers, economists forgot for many years to address those very topics that sociology, anthropology, and the other social sciences have concentrated upon (but without the benefit of some of the tools that economists can add). And some of those economic tools could prove very helpful to those of us in the other social sciences.

    The “new” economists aren’t making the same set of mistakes (so far), but it’s the sort of intellectual pride that Ms. Coyle’s comment belies that led the discipline into the underbrush of disconnect before.

  • robert leaver

    Once upon a time, economics was about the economy of the household — a more mythic and soulful…

    Then economics got trapped in the tangible — land, raw materials and capital.

    Now, economics is moving to the invisible to understand the value of integrating, in addition to financial capital —

    Social trust and cohesion as social capital

    Nature as natural capital

    Creativity and knowledge as intellectual capital

    A business today, and entrepreneur today, a civic organization today — requires all four sources of capital to create value.

    The world requires a “balance sheet of the commons” that publicly accounts for the stock and flow of the four sources of capital.

  • Sutter

    With respect to “reductivism,” Nother, my own sense is that economics (like any social science) fails when it begins to presume that it can make very specific predictions, and that use of economics to make such predictions — about GDP or political outcomes or whatever — is almost always unwise. In contrast, economics can do a great job of explaining why things work the way they do at a high level of generality. In that sense, I found public choice theory to be useful: It explains the inherent difficulties of group decision-making, it explains why small, highly motivated interest groups can defeat initiatives supported (but only mildly) by far more people, etc. etc. But you’re right in that one can’t suggest that economic of public choice “models” can predict the future with any specificity.

  • Igor

    It’s interesting that all these so called “stars” don’t really say anything interesting, just common knowledge wrapped into fancy words.

    In all, this program sounds like large ad for gentler, softer economics, economics that is good for you, ask you doctor, etc.

  • jazzman

    Jazzman’s law: If economics were a science then competent economists would be wealthy.

    As with all social (non-physics based) science, the science part is a misnomer and used to give cachet to those who earn a living practicing these pseudosciences.

  • TheSandro

    I know personal anecdotes are not meaningful in macro discussions but your comment about living next to a Chinese restaurant because Jews lived nearby resounded. My immigrant father had a not dissimilar attitude when we were living in a poor, mostly Jewish and Italian neighborhood in NYC. I asked him why I could not attend the local parochial school. His reply: “Catholic schools do not teach you to think. They produce policemen, clerks, and secretaries. You are going to go to school with Jews.” So I went to Public Schools where there were inspirational teachers who then encouraged me to take the exam for Stuyvesant, the high school noted for having produced more MDs and Ph.Ds than any other high school in the US. And then received several college scholarships. More than anything I credit several great teachers who paid attention to me. Sadly, I doubt resources are available to blanket most poor students with inspired teachers. A requirement, in my opinion, to make a dent.

  • Igor

    You don’t need to be an economist to understand than good schools are better that bad schools. And _everybody_ knows that, every family that can afford it moves to a nice suburb (i.e. with good schools) when the children come closer to school age and even before that.

    All that talk about choices, it’s again that “blame the victim” stuff as if the problem is that parents choose bad schools oved good ones. Why do we have to have bad schools to begin with?

    The whole system is broken, like funding schools from local (property) taxes, etc. Interestingly, here is something for economists to think about, but no takers, as far as I can see.

    One more point, this smart*ss talking about empolyers being like spouses, well, having been laid out once tells you more about this than all the behavioral economics in the world, like out of the blue after all these years in the company you are given 2 hours to clean your workplace and leave because someone on the top decided to “rightsize”, “streamline” or whatever the current word is. Obviously, Assistant Professor never experienced this and why should he? Will spoil such a nice research topic, no doubt…

  • Igor

    Forgot to mention, in these two hours you are _forbidden_ to tell anybody in the company that you are fired. Some family, huh?

  • Please search up on “Richard Thaler” he was one of the best know theorist for Behavioral Finance/economics.

    Another book to read:

    Armchair Economist: Economics And Everyday Experience (Steven Landsburg )

    Some interesting article that you can read on web:

    http://www.pbs.org/wsw/news/fortunearticle_20050308_01.html

    http://www.washingtonpost.com/ac2/wp-dyn/A41329-2002Jan26

  • herbert browne

    It would have been interesting to have had the benefit of an enlightened non-economist to question some of the “kinder, gentler” assertions presented (right on, Igor)… David Warsh (author of “Knowledge & the Wealth of Nations”) came to mind.

    Re “Jazzman’s law: If economics were a science then competent economists would be wealthy..”

    Would a corollary be “if hydrology were a science, then hydrologists would have the best water rights”? There’s an old saying- “To talk of bulls is not the same thing as facing the animal in the ring.” ^..^

  • One principle economist hold dear is Pareto Optimality–the idea that a decision is good if it makes at least one party better off while not making other parties worse off.

    Some argue we can view global economic growth in these terms generally speaking (especially if we ignore our lasting brontosaurus-sized ecological footprint and other factors). That is, even though a few percent of the people in the world have become super-size-me rich, the poor have seen their average daily income double from a dollar a day to two dollars a day.

    Yet all the scientific analysis and data in the world cannot answer the question of whether this is just and humane.

    I recall an interesting tale I read in a book by Michel Serres. In brief:

    A ship goes down in a battle during the Pacific War and the survivors end up miraculously on a tropical island. The natives embrace them and over time they exchange many things about their cultures, including games. Time passes and to fill it, they spend long hours engaged in soccer matches or talking soccer strategy over rootbeer. The islanders become very adept and learn how to defend and attack well.

    Then one day an aircraft carrier appears on the horizon and paradise is lost for the survivors, who are repatriated after many goodbyes and tears. The war ends at Hiroshima and the sailors return home.

    After a time, two of the survivors spot each other in a bar in some Western city. They get talking about their tropical heaven and decide to round up some of the others and head back there for a visit.

    When they return, there are great feasts, songs and mournings at the graves of friends who have passed on. Then they turn to leisure and one evening the king leads them to a stadium for a soccer game between to towns, from the east and west of the island. The game ends with a score of 3-1 at the end of 30 min. The survivors get up to leave but the crowd clamors, “no, sit down. It is not finished”. The match continues with great flare and excitement and by the wee hours of dawn the score is 8-7. Will the game ever end, the sailors think to themselves. Suddenly the crowd rises and shouts in joy. The tying goal has been scored and the game ends with equality.

    But the sailors can’t understand. The islanders have changed the rules. They tell them that a game ends when one team wins and one loses. The islanders ask what will they do if they have one pancake. The sailors answer they will cut it up evenly for the number sitting around the fire. A piece for everyone. “So in soccer one team should get the whole pancake and the other team nothing?” ask the islanders. The sailors are silent. The islanders explain that they play to be just and human and so if the game ends nil-nil, the result is true sharing. If not, they play on, sometimes for days, until a tie is reached and sharing returns. Then both teams can feast. Any other result would be uncivilized as it would humiliate the loser.

    Later, as they sail back towards their own families on the journey homeward, the sailors get talking. One asks if they really won the war.

    “Yes, at Hiroshima”, answers another.

    “But did we truly win it?”

    “You mean the true conquerors?” “They are the ethnologist and sociologist that take the islanders and other men as objects of their study.” “But how can one claim victory and be triumphant if they understands others from this perspective and not as fellow human or neighbors?”

    Serres does not mention economists, but many also seek to conquer the world and turn everything and everybody into capital and currency to gain the measure of and over.

  • Chris kept asking the pertinent question, “Where is the economics?” So many of the areas of research these economists talked about were the subjects of sociology, psychology, political science and other fields in years past. So why economics?

    Robert L. Heilbroner in his book 21st Century Capitalism begins by asking why is there a need for economics and for a more scientific study of production and distribution? He answers this by looking at the mechanism of the market and how it differs from societies organized on a system of tradition, such as the Kalahari bushmen, or a system of command, such as Soviet society. For these latter two, production and distribution can be explained by anthropologists and political scientists in turn. But the invisible hand of the market requires economics to examine and assess the 5W+H of all the individual choices.

    So again, why economics? The market has come to dominate all realms of life and social institutions more than at any time in history, especially in America. So it is no surprise that the dismal would-be scientists are tabulating and speculating about everything under the sun we think, feel and do and just how economically rational it all is.

    God help us. By the way, how much does s/he cost?

  • Potter

    Not bad for a show that just fell together at the last moment!! Actually pretty good.

    So I was driving along this AM and lo and behold this report comes over the BBC on the gender imbalance in China.

    Chinese family planning policy has only allowed only one child per family ( I believe since the 1980’s). Since so many preferred to have boys (with the help of ultrasound and abortions) so many males were born that by 2020 there will be 30 million more men than women, a pronounced gender imbalance.

    The report says that because of this girls have their pick of husbands. Also there is an increase in prostitution and trafficking of women. As well, women will be marrying younger and younger. And there are more mental problems among men.

    The males that make or have the most money are the ones that will have the best chance of marrying. In poorest parts of China, the rural areas, men will not be able to find wives and their families are saving for dowries.

    All of this has economic implications. For one, incentives for achieving financial success will become very strong.

  • silvio.rabioso

    As Robert Leaver mentioned, economics was once the study of household laws. The concept has shifted to become one of the fields of what we call ‘social science.’ The social sciences themselves are relatively new to humanity (remember, all Western science was once done by philosophers: Aristotle, Pythagoras, Copernicus, Galileo, Kant…calculus was invented by a philosopher—Leibniz).

    Once Kant cleaved positive science from metaphysical speculation (done most convincingly in his Critique of Pure Reason of the 1780s), the social sciences were free to propose models of predictable human behavior. Kant told his Enlightenment listeners to avoid what he called the logical traps (paralogisms) of questions about the soul, God and free will. Once the metaphysician no longer had to worry about free will, the scientist (and later, the social scientist) was free to act as if that philosophical problem no longer existed.

    By bracketing off these metaphysical problems (again: God, free will and the soul), the social sciences have created models of humankind that work on simple (but now increasingly complex) theories of correlation and causality. Humans (or even…gasp…human systems) behave according to model A; any deviation from this model is labeled an “externality.” The irony here is that in the very moment when an individual or a group asserts free will, he/she/it is discarded and euphemized as ‘outlier’, ‘externality’ or ‘unintended consequence’.

    Economics, and especially behavioral economics, MUST deny the existence of free will. If economics is able to predict human behavior, is does only because it assumes that a human being will ALWAYS behave in a certain way under a given set of circumstances…i.e. no autonomy.

    Fast-forward two hundred years: we have social scientists claiming to operate in a philosophical manner as they use strictly positivist methodology to explore metaphysical questions. The tweaks and refinements to rational choice theory that pass for advances in the social sciences and analytic philosophy remind me of the ever-more subtle spheres introduced into the Ptolemaic astronomical system to keep up with observed phenomena. But like Copernicus showed the world that he had a more elegant explanation that truly accounted for the nature of the universe he knew, so too will philosophers cut through the absurd rhetoric of a ‘kinder, gentler economics’ to show the poverty of the social scientist’s view of the interrelationship of humans and nature.

    Or, in the words of a Bolivian living without land rights or access to affordable water, or those of a South African who cannot purchase life-saving medications because of something called IP rights, or from an Argentine who had his life savings converted into worthless paper in December of 2001: “What have economics done for me lately?”

  • jazzman

    Herbert Browne says: Would a corollary be “if hydrology were a science, then hydrologists would have the best water rights”?

    No, that is not a corollary, as it assumes an economic or selfish motivation on the part of hydrologists to acquire the best water rights and for all I know some may finagle to obtain the premium water rights if they have the wherewithal.

    While not every economist may be motivated to use his “scientific knowledge” for self enrichment, living in western society generally requires a threshold level of income for a comfortable existence. As economists are interested in economics it’s reasonable to think that if they actually could predict economic results with certainty (say as physics or chemistry can predict the outcomes of atomic reactions), that they would use “economic science” to increase their pecuniary comfort level.

    My point was that so called “soft” sciences are not science at all but investigations of phenomena that are beyond the realm of true science and can’t be subjected to scientific method. When a phenomenon is approached scientifically, it means that methodological analysis is used to study it (but it isn’t science), in the case of predictable economics it’s basically simple math.

    In the case of meteorology or hydrology it’s complex math and while in principle outcomes could be predicted (as they are composed of physical elements that obey physical laws) with enough knowledge of initial or contributing conditions, in reality only the most general outcomes are predictable (and often wrong).

    In social science the components that are subject to analysis are abstract and largely hypothetical and IMO will never be elevated to the realm of hard science.

    In the brief perusal of the silvio.rabioso above as I was posting this, I believe he has stated the situation succinctly and correctly. Nice analysis Silvio!!

    Peace to ALL,

    Jazzman

  • silvio.rabioso:

    Please clarify my understanding of your point. Do social sciences/economics hinder human progress because these “unintended consequences” dont fit neatly into economists’ behavioral systems? Do social models rely too much on convenient data, sidestepping the fact that social science itself is a behavioral system?

  • plnelson

    Sidewalker says –

    “Economics used to be about markets and predictions: tax rates, interest rates, fiscal policy, monetary policy. In short, about money.

    And before that, economics used to be about full-employment and the greater public good.”

    No it was never about that.

    Saying that economics was “about” those things is like saying that atmospheric physics is “about” the Kyoto Treaty because policy makers use scientific input to try to set CO2 targets.

    Economics has always been an attempt to scientifically explain human choice behavior, especially how humans make decisions regarding scarcity or valuation. Policy makers may attempt to apply economic throery to questions of employment, etc, but fundamentally economics is an attempt to study human behavior scientifically.

    The big problem with the social and behavioral sciences (economics, sociology, psychology, etc) is that they are not scientific ENOUGH – they lack the scientific rigour, clear definitions, reliable data, control groups and hard-cscience grounding necessary to make good progress.

  • plnelson

    She noted that sociology and anthropology had previously addressed some of these topics that behavioral economists are now addressing. The critical difference was that “now it’s being done with science.”

    The problem is that none of the social and behavioral sciences are very scientifically rigorous. I don’t think that economics is any more rigorous than, say, sociology, but all of them WISH they were as rigorous as the physical and biological sciences, so they create arcane jargon and complex models, but they are really cargo-cult sciences : They hope that by adopting the outward form of the physical sciences some of the actual rigour of the sciences will rub off on them.

    But the differences between the social sciences and the real ones is this: social scientists’ models are built of metaphors – there is no such thing as a “choice” or a “value” – these are epiphenomena of lower-level neurological processes. They are simply convenient conversational simplifications. By comparison, when a scientist refers to, say, calcium carbonate (CaCO3) he’s referring to something that’s physically real in the universe, not merely a concept or a metaphor.

  • plnelson

    Economics, and especially behavioral economics, MUST deny the existence of free will.

    There is no question of DENYING the existence of free will. It’s really up to the proponents of “free will” to suggest a plausible basis for its existence.

    In this universe we know about deterministic phenomena, for example in physics and chemistry, and non-deterministic phenomena, for example in quantum mechanics. Unfortunately, neither one provides a basis for a belief in free will. So unless you are prepared to introduce a new branch of physics and provude a basis to think the human brain operates under its influence, they there’s no point in talking about “free will”.

  • Brendansays –

    “Economics used to be about markets and predictions: tax rates, interest rates, fiscal policy, monetary policy. In short, about money.”

    sidewalker says

    And before that, economics used to be about full-employment and the greater public good.”

    plnelson says –

    No it was never about that.

    Economics has always been an attempt to scientifically explain human choice behavior, especially how humans make decisions regarding scarcity or valuation.

    plneson, you just do not go back far enough. If you are talking about mainstream economics, what you say holds, but if you travel further down the tree to political economics, you find that economics was very much concerned with the public good and not just understanding economic behavior. Prescriptive as well as descriptive. What Adam Smith says in The Wealth of Nations bears this out:

    Political economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to supply a plentiful revenue or product for the people, or, more properly, to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign.

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