On economics: Germs of choice

Recently Alex Coleman stated on twitter that he found economics ridiculous (in his defense, I specifically believe he is talking about macroeconomics – not the other 95% of economics that is not macroeconomics.  Also, he probably heard an economist on the radio – we always sound a bit ridiculous floating in the media).  That’s cool.  A lot of tweets were written by people, most of which I won’t bother replying to as they tend to be hogwash that people throw out when they know nothing about economics but just want to attack economists – it frustrates me, and I’d rather not be frustrated right now 😉 .

However, I read these sorts of threads as sometimes people make interesting points I had not heard, or had heard before but feel like I want to consider them more.  I found this comment by Danyl from Dim Post interesting in that way:

@ShakingStick I see it as a bit like medicine prior to germ theory

— Danyl Mclauchlan (@danylmc) March 13, 2014

So what does that mean?  I’ll give it a go, and hopefully my discussion is in the same way he is considering it!

Germ theory = choice theory?

Guessing from posts in the past, Danyl views the “theory of choice” as a key weakness in what economists do.  Down the bottom of the post you can see me quickly saying something about choice, but it is a fair issue for us to all think about.

It is a common view in the public that economists rely on “homo economicus” with excessive views of “rational choice” and “perfect information”.  Hell you even see economists saying it to each other as an insult.  But it is not true – our views on choice are more varied than that!

However, this is not to say there is nothing in what Danyl is saying – far from it.  I think it is one of those points people “whip out” to sound smart, but if it is done thoughtfully it is a really smart point!  Economics as I’ve described it in the past is similar to most social and physical scientific disciplines in that it follow scientific realism.  In this way our characterization of our “counterfactual world” is pretty important!

The push towards neuroeconomics and behavioural economics (which are significant parts of macroeconomics and finance now) can be seen as part of the way economists are trying to incorporate and understand those ideas.  Furthermore, in papers like MacCurdy etal (1990 – Assessing empirical approach for analyzing taxes and labor supply) the idea of ‘utility maximisation’  as an assumption, and its impact on the domain of possible results we could find from data is criticised – and a lot of literature on estimating effects has tried carefully to take this into account ever since.  Note:  An interesting paper I only read recently discussing part of MacCurdy etal regarding utility maximization is this (REPEC) – it is an area where I think debate is not just still active, but still fascinating!

Now, the limitations of collecting data, and also of perceiving the actions (and their costs and benefits) of others, makes all of this very difficult – this is part of the reason why economists hold back from looking for general or universal laws, and tend to use “many models” in order to answer specific conditional questions.  Furthermore, when answering those questions economists try to “generalise” the choice requirements as much as possible – to know what “core assumptions” the result may rely upon – the simplistic examples, with restrictive choice conditions, are not chosen because they are how economists do things, they are chosen for the simplicity of exposition!

On the limits of intuition

But here is the thing, economists more than accept these shortcomings (in general) and should as a result be humble about their knowledge.  I also agree that economists can, at times, overuse appeal to authority.  However, they still do spend a long time researching, using data, and testing different types of hypotheses about what is going on.

The fact that our knowledge is of an inexact nature implies that following a principle such as “first do no harm”, like medicine does, is incredibly valuable.  This places limits on what we should expect the government to be able to come in and do – as the choice of government policy is a treatment.  Of course, there are specific ethical principles we may have that government, as a representative of all of us, can fill – given that an economist can help work out the trade-offs and costs and benefits both ex-ante and ex-post, but the discipline doesn’t tell us whether the policy is a bad or good idea.  Also, we can ask where the burden of proof lies given some assumption about where we start!

In this way, economists key focus is trade-offs.

Furthermore, the fact macroeconomics is complicated and our knowledge is conditional in nature does not in turn imply that the opinions stated by experts (eg the RBNZ) are equivalent to the opinions stated by everyone else.  It is not black and white – a discipline doesn’t provide perfect deductive knowledge or nothing.  I find it very strange in economics when the RBNZ says something and someone random will just say “na I don’t agree, that is just their opinion” – it is an opinion of a team of the smartest people in the country, using the data and understanding built up by thousands of other very smart people, I would trust that more than a random person.

Finally, Alex stated a concern about empiricism in his tweets to this – but the counter to empiricism is intuitionism, and economists have spent a long time asking whether “intuition” and/or “mathmatical logic” could allow us to find definitive results about social organisation.  Unsurprisingly, it did not.  This implies we need empiricism to test competing hypotheses.

I still don’t trust economists

That’s fine, maybe you had a bad experience with an economist when you are young, maybe you’ve met the wrong economists, maybe economists method makes them seem unconcerned with ethical issues you care about.  It doesn’t matter, I am not trying to tell you to trust economists.

All I’m trying to do here is say “hold up, and lets think about our concerns””.  The conclusions are:

1. Our concerns about the assumptions of economists are valid ones – but can also be overblown.  These are the types of issues economists spend a lot of time thinking about when discussing a characterisation of reality.
2. Our knowledge is conditional, and for specific questions – but this also implies that “folk economists” knowledge is much less than they often believe.  Saying that economists can’t explain everything does not immediately mean people can say whatever they want!