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July 23, 2005

Is Something the Matter With Economics?

Michael Blowhard writes:

Dear Blowhards --

Is there something dramatically wrong with economics? No way for me to know, of course: I'm nothing but a fan with the most basic understanding imaginable of the subject. Still, a couple of books that I nosed through recently have left me wondering if something in the kingdom might indeed be amiss.

"The Changing Face of Economics," edited by David Colander, Richard P.F. Holt, and J. Barkley Rosser Jr., is a roundup of interviews with well-established, mostly academic economists: Kenneth Arrow, Robert Frank, Deidre McCloskey, others.

Most of them seem to be working and thinking at least partly in reaction against Paul Samuelson, the economist and textbook author whose Great Society neo-Keynesianism put Friedrich von Blowhard and me off economics back in the 1970s. About time people turned on Samuelson! Oh, was there ever a lot of arrogant talk around in those days about the possibility of "fine-tuning the economy" even as the actual economy was spinning off into previously-unseen whirlpools of stagflation ... The editors courteously give Samuelson space to reply at the end of their book. He handles the challenge in a gentlemanly fashion.

Here are some of the interviewee's remarks.

  • From Kenneth Binmore: "Economists traditionally promise more than they can deliver ... We certainly need to melt the boundaries between economics and psychology."

  • From Herbert Gintis: "Undergraduate economics is a joke -- macro is okay, but micro is a joke because they teach this stuff that you know is not true. They know the general equilibrium model is not true. The model has no good stability properties, it doesn't predict anything interesting, but they teach it ... "

  • From Robert Frank: "If you look at the Darwinian framework ... it would seem that you should care only about the things that promote your narrow goals. But the evidence was fairly clear that people did seem to care about more than that. ... You see the concern about status, or the concern about fairness, and then you ask, 'Well this seems to motivate people to incur costs that they could avoid. How is that consistent with our belief that people had a struggle to acquire scarce resources all through the eons?'"

  • From "Buz" Brock: "I'd rather see less ideology and more careful reporting of the true level of uncertainty ... On the one hand I can understand when people remain tied to their model in the face of somewhat contradictory evidence. But on the other hand people who make policy statements when the data might equally well support two paradigms are not following good practice. I think we need more honest reporting of uncertainty."

  • From the ecological economist Richard Norgaard: "My major problem is with the culture of economists and their use of the neoclassical model, not the model itself, because the model is no better or worse than a lot of other models ... Quite frankly, economists are like highway engineers who know how to make perfect roads but who are afraid to work with society on the obvious question of where we should build the roads."

  • From Kenneth Arrow: "As I think more about complexity theory, I become more convinced that there is some sense in which we will never know how the economy operates ... There is no guarantee that there is a simple system underlying our reality; it may very well be a complex system that underlies our complex system."

For most of the "Changing Face" crowd, the field needs some correction, but nothing fundamental. One mathematical-modeling whiz says straight-out that there's nothing wrong with mathematical modeling that better mathematical modeling can't fix. For the heterodox economists whose thoughts are put on display in another book, "A Guide to What's Wrong With Economics," edited by Edward Fullbrook, what's wrong with economics is far more basic, and the fixes that are needed are far more wide-ranging.

"A Guide" is a bulletin from the heart of what's known as the Post-Autistic Economics Network -- many thanks to Jimbo for introducing me to this interesting crowd. As their name suggests, the PAE rebels think that establishment economics has become "autistic" -- ie., rigid, over-focused on mathematical models, closed to life as it's actually led, and blind to alternative explanations and approaches.

They're a ragtag group: righties co-exist with lefties, Marxists with chaos theorists, feminists with institutional historians. Because of this, it's hard to summarize what they stand for. (Here's a good account of today's heterodox-economics scene.) What they do share, in the most general sense, is the conviction that there shouldn't be one "economics" but many -- a feeling that we'll know our subject better the more angles we look at it from.

The PAE'ers don't want to narrow economics down and firm it up. And they seethe when economics becomes a numbers game divorced from the grit and paradoxes of actual life. Instead, they call for an economics that is more open, more expansive, and more multidimensional. Why juggle numbers so obsessively? Aren't history, politics, psychology, sociology, biology, and culture just as important as math in understanding what is, after all, human behavior?

Some passages from this book:

  • From Hugh Stretton: "A lot of modern economic theory [assumes] that people seek 'utility,' meaning whatever turns them on. But to know your business as an economist, and to understand or predict particular economic activities ... you may often need to look outside the boundary of economics for some of the forces that drive the behavior inside it."

  • From Edward Fullbrook (who contributes an essay entitled "Are You Rational?"): "By the lights of the neoclassical paradigm, spontaneous consumption decisions and those people who make them are irrational. The joys of carnival, the pleasures of impulse buying, and the elation of lubricated but unpremeditated conviviality are examples of categories of consumer choice ... and therefore fall foul of the neoclassical regime of good consumership."

  • From Emmanuelle Benicourt: "It is rather striking to note that persons interested in consumers' effective choices -- such as managers and marketing specialists -- appeal to scholars who really observe them (psychologists, sociologist ...) and not to microeconomists, who deal with fictitious agents."

  • From Peter Earl: "What is striking about the economists' analysis [of consumer behavior] is that it is of a 'one size fits all' variety, in that there is no suggestion that consumers might make their choices in different ways in different contexts ... Mainstream economists have little to say about habits, for example ...

  • From Renato Di Ruzza and Joseph Halevi: "It is virtually impossible to treat economic variables in isolation and in the abstract. Those ... variables are not like minerals that can be taken out of the rocks and cut, analyzed, and used industrially. They, instead, are inseparable from the social 'rocks.'"

  • From Charles Wilber: "All evidence indicates that economic actors act out of more than calculated self-interest. Thus the assumption of rationality used in economics may be insufficient in some cases and inappropriate in others. In fact, people's behavior is influenced by many things, including ethical norms."

  • From Richard Wolff: "Efficiency analysis is an illusion. Economists cannot identify all the consequences of any act, event, or institution, and they cannot measure them all either. It is not possible. Economists make claims about efficiency ... but logic demand that we reject their claims. No identification and measurement of all the consequences of anything have ever been achieved."

  • From Jean Gadrey (in an essay entitled "What's Wrong With GDP and Growth? The Need for Alternative Indicators"): "The organized destruction of the Amazon rainforest is an activity that increases global GDP. Nowhere is any account taken of the resultant loss of natural resources, or of the various effects on climate or biodiversity ... [Even] an increase in free time is not regarded as an asset worthy of being included in the measure of national wealth."

I confess that I enjoyed the many potshots taken at ivory-tower academics. I've done my own share of head-shaking over self-loving, spinning-their-wheels academicians. In my case, I followed book publishing closely for a couple of decades. In that entire time -- during which I was interviewing authors, lunching with agents and publishers, and attending publishing events -- I never once encountered a literary academic who was investigating how this thing called "literature" actually comes about -- not a one who was doing actual fieldwork. Instead of looking into the politics, the economics, the personalities, the institutions, and the business of writing and publishing, literary academics of the time were (what else?) debating Theory. Not coincidentally, I never once met a lit prof who showed any interest whatsoever in what I'd learned about writing and publishing, and about how literature does (or doesn't) arise from these activities. Instead, they always wanted to lecture me about what literature really is. Sigh.

Hey, a real-life topic I'd love to see some take on: bad, mistaken, and stupid purchases.

The idea that what we buy represents what we want strikes me as absurd. In my case: Well, sometimes it does, and often it doesn't. For instance, I have a shelf-ful of electronic gizmos -- bought and paid-for -- that I have never managed to make use of. There they sit, gathering dust -- and here I am, regretting each one of these purchases. Happy to agree that at the moment I handed over my credit card, I thought I wanted that gizmo -- but, y'know, in fact I didn't.

Even so far as the purchase of items as basic as clothing go, my batting average isn't good. I wind up making regular use of no more than half the clothes I buy. There's food in the fridge I don't manage to eat before having to throw it away. I buy many, many more books than I'll ever get around to reading.

For the heck of it, let's assume that I'm not unusual. So let's multiply me times a couple of hundred million ... Now: Who can call this whole bad-purchases thing a negligeable economic phenomenon? It must represent billions of dollars in transactions, and many hundreds of millions of hours in shopping and activity-time.

A couple of questions: 1) Where are the studies of our bad, wasted, and stupid buying and buying patterns, and of their effect on economic life generally? And 2) How to reconcile my experience with the textbook idea that what I purchase represents what I want?

A more general question: Should economics be a limited enterprise, one that conducts modest, discrete experiments and that lets the big vision take care of itself? Perhaps that's a reasonable and realistic way to conceive of the field. Of course, when economics got on its feet back in the 18th century, it was no such modest thing. Instead, it was "political economy," the study of very much indeed, an attempt to explain massive social phenomena in very sweeping terms.

As it does so often, it seems to be up to us -- as in "us, the general public" -- to know how to take the experts. IMHO, we need to know a bit about econ if only to be better able to defend ourselves against the economics professionals. (Especially the lofty Godhead wannabes.) One of the reasons I'm a fan of Arnold Kling and of Marginal Revolution is their tone: open, searching, not overly preoccupied with winning debates or having last words, and respectful of the larger context we all operate in and share.

FWIW, I think of economics as resembling meteorology. Like the weatherguys, economists know a lot, and have a lot that's interesting to tell us. But can a weatherguy's predictions be taken seriously once they extend beyond a very short range? We have no trouble enjoying and making use of the work of meteorologists while being wary of analytical or predictive claims that are too grand. We know that the weather is infinitely complex, and that meteorologists will never master it. Yet we give economists much more credence than we do weatherguys. Why?

Anyone who has avoided econ but who now wants to start entering the conversation could do worse than check out this posting-and-commentsfest. Lots of recs (from me and from many visitors) about good intro-to-economics resources.

Some of the best intros-to-econ that I know of are Timothy Taylor's lecture series for the Teaching Company. One is a general survey of the field that's called simply "Economics." The other is a fast cruise through the history of economic thought. Both of these series are clear, friendly, helpful, enthusiastic, and modest. They're also perfect for people with lib-arts brains: no numbers (I hate those things!), and no charts or graphs (patooie!). At the moment, both of these terrific series are on sale for ridiculously low prices.

Here's a website devoted to the GPI, an alternative to the GDP. Here's a posting where I link to a lot of behavioral-economics resources.

At the moment, I'm making my way through Hugh Stretton's alternative intro-to-econ textbook. 900 pages of economic heterodoxy! More on that in ... well, maybe two or three years.



posted by Michael at July 23, 2005


Very interesting post and references. Even though I walk both the lib arts and math based sides of the street, I sympathize with the idea of economics references without math or charts, although I think that at some level you absolutely have to deal with numbers at some level in order to understand what is going on. I recall that there is a reporter, Robert Krulwich (who I first saw on CBS, but then later on ABC and CBS) who could come up with easy to comprehend visual models for economic concepts.

Some of the criticisms you cite of economists strike me as being interesting and a nice cumuppence, though many of them don’t illuminate economics issues or suggest fruitful directions for future investigations. It does indicate that economists, like political pundits, should be slapped around when their predictions fail to come through. I would think that in an ideal world, economists (and pundits) who are consistently wrong should lose access to the media for a while.

As for “studies of our bad, wasted, and stupid buying and buying patterns, and their effect on economic phenomena generally,” I am not sure where you think this should lead. After all, a bad or a remorseful choice is still a freely made choice, and a purchase that is discarded is simply “used up” faster than a purchase that you use for a long time. It also suggests that the satisfaction of demand by supply, transactions between buyers and sellers, is imperfect or can take numerous attempts to get right, but basic economic theory is still satisfied. A similar phenomenon might be a product that is “before its time.” The first attempts to get microwave ovens out of industrial and college settings failed, leaving companies in the dust, before buying habits and pricing made microwave ovens cheap and ubiquitous.

I would be interested to see more about "criminal activity" and economic behavior. For example, I did a little thing once for a university extension course about Prohibition and prices. I was looking into the libertarian delusion that if you eliminated legal prohibitions against vice (e.g. drug sales) the price would immediately plummet and everyone would be happy. But I found that during Prohibition, the price of illegal alcohol did not go up significantly, because the pre-Prohibition markets had set the price, and most people simply were not willing to pay super high premiums. Similarly, once Prohibition ended, there were -- as before -- high priced products and cheap rotgut products to satisfy the market. Prices for illegal drugs today seem to be relatively low and stable, despite the "war on drugs," apparently in part because production and distribution are efficient despite law enforcement efforts, and demand for many products is consistently high (in many ways). And since illegal and black markets make up a significant portion of every nation's economy, I find it odd that this is such a taboo area for research, and am frustrated that what comes from ideological commentators is so out of touch with reality.

We all shop and do economics, so I guess it’s natural that we all have (or think we have) an understanding of how buying and selling works. And I do believe that at some ultimate level an economic model or theory that does not reconcile or explain real world behavior is worthless intellectual masturbation. On the other hand, some carping about basic economic principles reminds me of friends who insist that the mathematics of probability is bunk, that luck and streaks are real, and ignore the hard fact that when you factor in hundreds of millions of bets, probability rules, bell curves are observed, and the house always wins, otherwise Vegas hotels and casinos could not continue to exist.

Posted by: Alec on July 23, 2005 06:17 PM


In defense of what you call "the libertarian delusion", it seems to me that the price probably /did/ plummet upon legalization, if you include in your calculated price such nonmonetary costs as the risk of going blind, the risk of being caught and imprisoned or fined, the risk of having to pay bribes or being beaten up, and the subjective cost of not being able to get your drug of choice in a suitable dosage and a timely manner. The cost in /dollars/ seems kind of small and insignificant compared to some of those.

Post-prohibition, people might have spent a similar number of dollars for their product, but it was a better product they were getting. More convenient, more safe, more consistent.

During prohibition, one cost of buying alcohol is that one is forced to associate with criminals. For people who are already criminals or already have friends who are criminals, that doesn't add much inconvenience, but for people who aren't, it's a significant cost. Under legalization, that cost goes away, so the "price" of the drug has declined.

Personal example: I personally would probably buy pot on occasion if I knew where to get it without running any legal risk or risk of being ripped off. But I don't, so I don't. If pot were made legal and I bought it for the same price that better-connected people are buying it now, hasn't the price /for me/ declined?

Posted by: Glen Raphael on July 23, 2005 06:44 PM

the main problem with economics is that it does not explicitly incorporate human genetics and evolution into its framework.

scratch the feminists and marxists and touchy feely types at the outset. we do not need economics to be fuzzier. we need it to become more precise. To make it more precise it must predict experiment. It must predict human behavior.

To do this we need direct experiments with nontrivial sample sizes with real humans making economic decisions. Kahnemann et al. have shown the way.

Posted by: genethug on July 23, 2005 07:17 PM

Marxists in Post-Autistic Network? People calling themselves marxists who participate in a group that don't trust objective reality of *numbers* and advocate incorporation of culture, psychology etc into mathematical models of economics? What about primate of material over conscious (need help with translation; does anybody remembers the quote in English?)

I'd be much interested to hear by what twisted logic those so called Marxists made the connection.

Which reminds me of an old Soviet joke (going on a tangent here):
- Mommy, who's Karl Marx?
- Oh, he was a...a... an economist, among other things
-Like my Auntie Sarah?
- No, dear, what a thought! Your Auntie Sarah is Senior economist!

Posted by: Tatyana on July 23, 2005 07:49 PM

I'm sure you've heard this one, but here goes:
Three econometricians went out hunting, and came across a large deer. The first econometrician fired, but missed, by a meter to the left. The second econometrician fired, but also missed, by a meter to the right. The third econometrician didn't fire, but shouted in triumph, "We got it! We got it!"

HEH, indeed.

Posted by: jake on July 24, 2005 09:23 AM

Three economists and three mathematicians were going for a trip by train. Before the journey, the mathematicians bought 3 tickets but economists only bought one. The mathematicians were glad their stupid colleagues were going to pay a fine. However, when the conductor was approaching their compartment, all three economists went to the nearest toilet. The conductor, noticing that somebody was in the toilet, knocked on the door. In reply he saw a hand with one ticket. He checked it and the economists saved 2/3 of the ticket price.
The next day, the mathematicians decided to use the same strategy- they bought only one ticket, but economists did not buy tickets at all! When the mathematicians saw the conductor, they hid in the toilet, and when they heard knocking they handed in the ticket. They did not get it back.
Why? The economists took it and went to the other toilet.

Posted by: jake on July 24, 2005 09:41 AM

Glen, sorry, by any reasonable measure, the price of alcohol did not simply plummet after Prohibition, nor did it rise greatly during Prohibition. The risk of going blind is overstated (though real) since in most areas, the alcohol consumed was not produced by local illegal breweries, but was imported illegally from legal distilleries and wineries in Canada, Europe and the Caribbean and also depended on what the drinker was looking for (re-fortified beer, for example, was a non-issue with respect to any risks). Organized crime families were largely distributors, not producers. As for subsidiary and “non-monetary costs” – Organized crime’s markup replaced state and federal taxes, and again, market forces controlled prices. Also, by the way, quite a few people got whiskey via prescriptions from their doctors filled by druggists, thus avoiding contact with “criminals” and other undesirables. You also have to factor in the degree to which the Temperance movement had convinced the public that legitimate sellers of alcohol were social criminals. Bootleggers, by comparison, were either just as bad or romantic outlaws.

Against the other non-monetary costs you mention have to weighed the social benefits of Prohibition that were lost after Repeal: National Prohibition reduced the consumption of alcoholic beverages by Americans by 50 percent, and thus reduced cirrhosis of the liver by 63 percent, mental hospital admissions for alcohol psychosis by 60 percent and arrests for drunk and disorderly behavior by 50 percent (see the Wikipedia Prohibition article on this). Ironically, some of the worst quality and most expensive post-Prohibition alcohol came from state controlled agencies that tried to get into the business immediately after Repeal, but were rejected by consumers. And it has only been in the last few decades that micro-breweries have achieved the quality of beer that was lost when more than half of all small breweries went out of business permanently as a result of Prohibition.

If you want to look at social and legal impediments to purchase as “price” (as opposed to “cost,” which is not quite the same thing), that’s up to you, but to me, $20 is $20, and I think that many drug dealers are as motivated to satisfy their customers as any other businessperson, and thus seek to minimize rip-offs, etc. Also, crack cocaine was so much cheaper than powder that it tempted many users to overcome the “cost” barriers, and war-on-drug types like to shout about the temptations of a super-marijuana more potent (higher quality) than 70s pot, so again I think that market forces rule.

By the way, my favorite Marxism joke is this classic: “Under capitalism, man exploits man. Under Marxism, it’s the other way around.”

Posted by: Alec on July 24, 2005 01:21 PM

Bit silly, really, recommending a book in which I have only just reached page 77! Still, I suspect it will lead to the sort of economic problems which worry your experts, but from a slightly different direction. It is called "Critical Mass" by Philip Ball, and in his own words is ".. an enquiry into the interplay of chance and neccessity in the way that human culture, customs, institutions, cooperation and conflict arise". It is aimed slightly above my low-brow, more towards the middle, so easily understood. Paperback by Arrow Books, part of Random House.

Posted by: David Duff on July 24, 2005 02:27 PM


If consumption was reduced by 50%, that means the cost went up to such a degree that 1/3rd of potential consumers were no longer willing to pay the full cost of the good in question. Doesn't it? Sure, count social disprobriation as an additional cost.

"Super-potent" marijuana was a myth. (Had it actually existed that would have been /better/ for users because they'd be able to smoke fewer joints to get the same effect. Instead, it appears the official early estimates for how much THC was in pot seem to have been off by an order of magnitude or so.)

Getting back to personal anecdote, I've always wanted to know what being stoned feels like. Thus I have tried smoking pot on a half-dozen different occasions but have noticed no effect whatsoever from it. Maybe I didn't smoke enough, or maybe what I smoked wasn't actually pot or wasn't sufficiently concentrated pot. Given the fact of illegality, there's simply no way for me to know whether what I had was, in fact, pot. If I could buy pot of known and consistent quality I could do a repeatable experiment - keep trying different amounts with one supplier until the desired effect is achieved or until I conclude that it actually has no effect.

If some guy on the street offers to sell me something he claims to be pot, there's nothing he can do to /scientifically document/ the potency or to provide a money-back guarantee or even much assurance that he'll be around and will have the same stuff next week or next month. So why would I trust his incentive to please the customer? For me, the uncertainty in the product quality and the risk of legal consequences /far/ outweigh the dollar price.

If you're just looking at the price in dollars, you're ignoring that the quality of the good is drastically different. Suppose you had a choice between buying:

(A) illegal pot from a street dealer, of unknown quality and with a chance of being arrested, imprisoned, and having your assets seized if caught, or

(B) legal pot from a cafe or retailer with a known reputation - you could sue them if the product wasn't as advertised - and no risk of being arrested.

Which would you buy? B, right? How much more would you pay? Me, I'd be willing to pay at least ten times more for (B) than for (A). Thus, when pot is made legal, the effective cost has declined for me by an order of magnitude.

Posted by: Glen Raphael on July 24, 2005 02:32 PM


I am afraid I can't quite understand the hostility to the neoclassical model that these people represent, since it seems to me that the current model has been wildly successful. Let me explain: I am 21 years old, and have never seen a depression. The "recessions" of my life, the one in 1990 which I am too young to remember, and the more recent one, were astonishingly light by any reasonable historical measure.

Economics, basically for the last century or so, has been focused on the goal of minimizing disruptions to the business cycle. And I cannot see any evidence that it has not been successful. Now that the profession has dumped the ideological baggage of Keynes and the disaster it wrought in the 70s, we have seen nearly 25 years of growth, with only minor hiccups. If, when you were studying economics, had been told "In 25 years, inflation will be kept basically under 3% in perpetuity, growth will continue at 3% annual despite major terroist attacks and oil price spikes, the 'natural rate of unemployment' will plunge and 5% will be the new standard, etc., etc." you rightly would have scoffed. And yet all of that is true. So how can we say that the current model has failed, despite it's problems (and what academic discipline doesn't have gaps?)

Now, one can quibble with whether business cycle moderation should be the main goal. I, for one, would rather see an emphasis on growth rather than equilibrium. And in fact economics is beginning to shift in this direction (the winner of the most recent Clark medal, perhaps a more prestigous award in the field than the Nobel, is a growth theorist).

I suppose I should confess my biases here: I am a math and econ double major planning to go to graduate school in economics, so I am perhaps the poster child for neoclassical dogmatism (I call it "rigor", but others might disagree). And while I do think there is an overpreocupation with mathematics (do I really need to be taking topology in my last semester?), without a fair amount of math it is impossible to determine if the models have any predictive power at all.

Posted by: Chris on July 25, 2005 12:39 PM

Maybe economists should consider the impact of their
observations on the observed. To what extent do
predictions feed into the system and either exacerbate or diminish the trends that are pointed out?

Posted by: Will on July 25, 2005 06:08 PM

Alec -- Studies of criminality (and black markets generally) would be fascinating to read about, especially once translated into non-math-y English. Given an interested party who's as nudgey (and math-phobic) as I can be, you'd be amazed how straightforward scientists and econ people can be made to be. Well, some of them, anyway. My point in raising the whole "bad purchases" question (and I'm sure economists could account for it in their terms, but their terms are what I'd like to see bend a bit) is 1) it's a common experience, and let's force the geniuses to wrestle a bit with commone experience (never hurts), and 2) my view of rationality differs a lot from theirs. As I understand it, they start from rationality and then factor in a bit of wiggle room. I start from wiggle room and marvel that "rationality" is ever achieved. I think my p-o-v rules, of course, but it's always fun to watch the deduce-from-axioms crowd contend with a few irregularities.

Genethug -- I'm a Kahneman fan too, and god knows it'd be great to see the econ crowd wrestle a bit more with biological thinking. Have you tried "Bionomics"? I loved the idea and read the book, but wasn't knocked out by it. Seemed like a good, hook-y premise for a book and a lecture series, and it certainly suits my lib-arts nature. But there wasn't a whole lot there beyond the economies-are-ecosystems-not-machines thang. Which, admittedly, is stirring. Are there more substantial treatments of the idea?

Tatyana -- I certainly understand your wariness of the Marxist crowd! I guess I tend to think that as long as they're making modest observations, they occasionally come up with interesting things to say. But it seems you've always got to keep an eye on 'em, doesn't it? Otherwise they'll try to take the whole scene over. I wonder why that is.

Jake -- Excellent jokes! I wish I'd been told them prior to taking the college econ classes I took!

David -- Thanks for the rec. The book sounds right up my alley, and pretty irresistable.

Chris -- I'm not sure "hostility" is quite the right word. The established people in the one book seem to want to add to it, and the young turks in the other book don't seem to want to destroy neoclassicism, they just want it to take its place as one p-o-v among many. But I take your point. I wonder how they'd respond. Would they point to Argenina, the meltdown in the far East, Malaysia , etc? What do I know, of course, but I gather that some think we're moving into a post-neoclassical world generally -- John Ralston Saul has a new book out arguing that. But he's probably got some ax to grind. My own misgivings about neoclassicism (not that anyone should pay attention) all come from my feeling that they reflect only certain aspects of human behavior and psychology, and they load it so heavily that the whole picture becomes distorted. I don't think such things as altruism, art, gift-giving, bad purchases and criminality are minor exceptions that mean that the machine of neoclassicism needs a little grease here and there. I think they're proof that the machine is dependent on (and arises from) a huge eco-system of non-machine factors and behaviors. Like I say: not that I should be paid attention to.

Will - So true! It all seems to get so top-heavy, and the studies and theories seem to become part of the picture, and then people build on that, etc. I do think the economists owe it to the rest of us to sponsor a study of the economics business. They analyze other institutions and businesses and tells us what they find. Some economist or other ought to write about the "business" of being an economist, and connect those findings up with the kind of conclusions and advice the economics "business" is selling the rest of us. That'd help us put it all in perspective.

Posted by: Michael Blowhard on July 25, 2005 07:22 PM

Michael, I was thinking more in terms of the impossibility of mathematically accurate prediction. But you're right, if economists purport to have a convincing explanation for the complex social phenomenon that an economy (or a business) is, the "reality" will probably tend to be modelled after the model - especially where you have a citizenry with a high proportion of university graduates.

Posted by: Will on July 26, 2005 11:04 AM

Very sanely put.

I bailed out of uni economics for similar reasons. having an arguable/defensible basis is not the same as a scientific approach. Less a priori, please, and a spot more a posteriori.

I've noted most fields of study/argument/religion/politics collapse to neat linear-scale monomanias. It's easier than thinking, no?

Posted by: Saltation on July 26, 2005 12:48 PM

I'm not quite sure that what you are discussing is exactly the field of "economics" though. Now, this may well indicate that "economics" is of limited usefulness---once you've kinda got the idea that markets will clear themselves if left alone and taxing anything creates less of it---maybe its sorta made its contribution.

"Irrational purchases"---well, what DO you do with that? How do you factor that into a model which predicts what will happen if interest rates rise?

It just sorta feels to me like "irrational" purchases fall more into the psych/cultural/sociology fields. It's why the comment that macroeconomics makes sense, but micro is useless, is valid. But it doesn't necessarily mean that "economics" can answer the unanswerable---what makes someone make an irrational purchase.

Posted by: annette on July 26, 2005 12:48 PM

I'm not so sure I believe that all of Microeconomics is not valid. Concepts like equilibrium make sense if you remember that perfection is just that - perfection. Examples of microeconomic models in action are everywhere, regardless of the value-laden concept of perfection. One of the reasons I was attracted to the Austrian conception of economics is that it does away with the ivory tower assumption that everything will reach perfection.

Utility is also not a useless concept. Many people believe that most economists think you can measure utility in units, when the reality is that it is more of a descriptive tool than anything else. Even if it is not measurable in units, then the principles of diminishing marginal utility still hold. The classic example of eating too much ice cream is a good one.

I think people do not give micro enough credit because many of the conclusions that are drawn from these still hold in varying degrees even in the absence of perfection

Posted by: Victor on July 26, 2005 01:34 PM

Michael, let me try to answer your two questions. 1) If you get access to an economic literature database, you will certainly find plenty of consumer behavior studies, including those that try to infer macroeconomic consequences of unusual consumer behavior. I'm not sure you will find them intelligible though. For abstracts, you can search but even abstracts are sometimes in econ-speak. The purpose of a PhD program in economics, as one of my professors used to say, is to enable students to read articles in refereed journals.

2) The relevant textbook concept is (or should be) "consumer preferences." It is easy to conceptualize your behavior as perfectly rational by assuming that your preferences are subject to sudden, unpredictable or/and uncontrollable change. Your "bad" purchases are as rational as your good ones in the sense that at those bad moments your preferences are such that you rationally choose to pick a "useless" item (i.e., you will find it useless later but right now you strongly prefer it to all others). The nature of these preference swings is subject matter of psychology but shopping behavior they generate fits into the standard econ model.

Of course things get complicated if present preferences depend on past preferences and influence future preferences, and even more complicated if consumers have expectations of their own future preferences. To get an idea of how a standard micro framework explains seemingly irrational behavior, you might study Gary Becker's early work -- it's mathematically straightforward. Among today's mainstream academic, Matthew Rabin seems the best-known behavioral economist.

Posted by: Alexei on July 27, 2005 02:45 AM

By the way, if you look at economics as a collection of frameworks, you can't say "micro is not valid" as it would make no sense. You can only say "this framework is not applicable here" or "your assumptions are wrong or too rough or irrelevant".

Posted by: Alexei on July 27, 2005 02:52 AM

What I wanna know is: why does everything COST SO MUCH?!?!

Posted by: ricpic on July 27, 2005 12:01 PM

On Michael's questions:

1) "Studies of our bad, wasted, and stupid buying and buying patterns" are hopeless. I refer you to the old saw: "There is no accounting for some peoples' tastes." What this really points up is the *individual* nature of values. Everybody likes to talk about "value" (in various terms), but very few understand that questions of value are utterly crippled without the qualifier: " *whom*?" It's all well & good to sit in the bleachers and condemn others' values as "bad", but that is never going to account for what makes any given player on the field act the way he does. And that is a mass of information that will never be known to a degree satisfactory to the presumptions of economics as it exists today.

2) The reconciliation is very simple: people make mistakes.

No big deal.

Posted by: Billy Beck on July 31, 2005 10:06 AM

As an hard-core engineer with an MBA, when discussing economists, I'm always reminded of a Woody Allen paraphrase about casual sex:

Economics is a social science, but as social sciences go, it's got to be one of the best.

Posted by: Whitehall on August 1, 2005 12:59 PM

Lots of weak thinking there, and a huge fallacies of composition.
because I can't predict the behavior an individual with classical
micro-economics doesn't mean that I won't make the best predictions
the average behavior of large groups.

The guy who laments he wears only half his clothes and uses a small
fraction of his electronics hasn't learned about the [micro-]economics
information. Information is costly. It may be cheaper for him to buy
pairs of pants and learn which one he likes, though time, than to
out before he buys the one, which one to buy. Using time to
comfort and fashion and utility is costly. For this guy, dollars are
costly, apparently, than the time he would otherwise have to spend.

Posted by: roman weil on August 1, 2005 01:54 PM

Roman -- So you're able to dismiss the reservations and criticisms expressed by the economists in these two books? Great! But based on what?

Posted by: Michael Blowhard on August 1, 2005 05:13 PM

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