Economists Say The Funniest Things

A short while ago, I tweeted that a show entitled “Economists Say the Funniest Things” – where economists opine on issues outside their domain – would make for good watching by those of us who inhabit the real world. Unfortunately, I can’t afford a show, so I’ll settle for a blog post.

I have previously posted on ‘economic imperialism’, but the examples in this post are, to put it bluntly, less serious, often crossing the line into simply silly.  Economists sometimes like to transpose their incentive-driven, utility-maximising agents onto complex social problems, and claim that they have discovered the elegant, underlying mechanics underneath all the noise that the other social sciences study. They will also argue that those who object to their framework do it simply because they don’t like or understand maths, or because they can’t stomach the often unpalatable conclusions of the model. In fact, it is these economists who are seemingly unable to comprehend the phenomena they purport to study, preferring instead to solve equations, which they label ‘models’, but which do not actually ‘model’ the world at all, and which often seem to lead the economist to ridiculous conclusions.

I will put a standard disclaimer out there: I’m not so much attacking the entire economics profession as the ‘pop’ economics that you find in books, on the internet and, sadly, sometimes in policy circles. I hope many economists – those who are able to comprehend history, the complexity of human behaviour and above all the difference between models and reality – will find these examples equally absurd.

Economists do psychology

Naturally, the sometimes infuriating Freakeconomics craze could warrant an entire post, as their ‘antics’ have angered many, including other economists. However, I am going to focus here on one of their less covered arguments: a story about incentives, which is at the beginning of their first book. It provides a nice introduction to wrongheaded economic imperialism, as this wooden insistence on how, underneath everything, people are essentially driven by clear incentives, underlies many of economist’s attempts to try their hand at other disciplines.

The story goes like this: an Israeli day care centre found that parents were picking up their children too late, so they introduced a small charge of $3 to try and disincentivise lateness. However, instead of discouraging this behaviour, the payment served to legitimise it and buy the parents piece of mind. The result was that lateness actually increased. Bizarrely, the Freakonomics duo decided that this story is consistent with economist’s way of thinking, and used it as an introduction to the idea that “incentives matter”. They argue that people actually face three different types of incentives: economic, moral and social. The idea is that the charges “substituted an economic incentive for a moral incentive (the guilt)”, with the implication that the daycare centre simply didn’t get the amount right. However, if this were true, treating guilt would be as simple as paying somebody that you had wronged.

The way people respond to incentives is in fact highly complex and unpredictable. Incentives that are too big or too small can have perverse effects. What’s more, how people will respond to any incentive depends on the perceived motives of the person offering it, and the implied motives of the person receiving it. Studies show that incentives can easily backfire if these motives are questionable, something that has had an impact on the field of organ donation: when people were offered money for donating, donations decreased. People simply no longer felt that they were helping people, only that they were making a bit of money. The Freakonomics guys do not engage with any of these well established psychological tendencies; they simply select three arbitrary and incommensurable concepts and proceed as if their analysis were obviously true. But it’s clear that, contrary to their mantra, claiming to be able to predict people’s response to incentives with certainty is simply a fool’s game.

Economists do history

Historians – at least, those who aren’t Niall Ferguson – try to emphasise context, combat euro-centric (and therefore usually capitalism-centric) narratives, and endlessly struggle against ‘Whig’ history, which suggests that history has naturally culminated in contemporary societies. History is therefore a prime stumbling ground for economists, whose models generally take place in a theoretical ‘vacuum’, take capitalist institutions and social relations as a given, and often model the economy as a deterministic time path or as in equilibrium. It seems that economists tend to see the ‘people respond to incentives’ behaviour outlined above as underlying history, and therefore believe that events naturally culminated in capitalistic behaviour; of course, the corollary is that deviations from this were caused by bad policy, externally imposed by governments.

This type of thinking is clear in Evsey Domar’s serfdom model, which attempted to explain the end of serfdom through notions of its profitability to the landowner. The model argues that if land is too plentiful relative to labour, this results in competition among landlords for workers, which drives wages up, and subsequently it becomes more profitable for landlords to use the institutions of serfdom and slavery to ‘put down’ labourers, rather than employ them for wages. Conversely, if land is scarce relative to labour, wages will remain low enough for wage labour to be profitable, and serfdom and slavery will disappear. Domar suggested that this explained the end of serfdom in Russia in the late 19th Century.

To be fair to Domar, he was more than ready to acknowledge the limitations of this model. One person who was less so, however, was Paul Krugman, who has used it as an illustration of why he considers economics the superior framework for social science. According to Krugman, models like Domar’s are an indication of how economics is “rigorous” and makes “generally correct predictions”. This latter characterisation is especially bizarre, because Krugman goes on to acknowledge that there are large areas of history the Domar model doesn’t explain, such as why serfdom was not reinstituted in Europe after the Black Death wiped out a large amount of the labour force, pushing up wages. According to Krugman, events such as these are “puzzles”. Surely they are just an indication that economist’s framework isn’t so great?

In fact, the Domar model actually doesn’t do a great job of explaining its prime example of 19th century Russia. The serf agreement was not simply forced onto peasants, but was a three way deal between the state, landlords and peasants: peasants had rights and were in many ways ‘free’, as long as they produced enough for the gentry, who were subsequently available for the military. What’s more, the 1861 ‘emancipation’ from serfdom was not instituted by the landlords based on considerations of profitability; the move was centrally directed by the state, based mostly on imperialist/defensive considerations after the Russian defeat in the Crimean War. Many landlords were resistant to the change, and though the legislation was passed a large number of restrictions remained, some effectively extending serfdom.1 Overall, the incentive-based behaviour outlined by Domar is irrelevant to the broader story of social and political change.

The root of the issue is the assumption is one that is not atypical in economics: the idea that the capitalist institution – in this case wage labour – is the ‘natural‘, underlying tendency, upon which artificial institutions like slavery and serfdom are ‘forced’. Indeed, Domar repeatedly refers to the wage labourer as the “free man”. But history shows us there are no natural, underlying institutions: capitalist, feudalist and slave(ist?) institutions are all complex, and their introduction is fragmented. Therefore, at worst, the Domar model is trivial: it suggests that if wage labour, serfdom and slavery are all easily available to landlords, they will choose the one most beneficial to them (in fairness, Domar acknowledges in one place that we might “question the need for [his model]“). However, you don’t need an economist to tell you this, and neither would they be able to tell you how such a situation arose in the first place. A historian would.

The next example continues our journey through Russian history, though perhaps that is stretching the definition of the word ‘history’. This one reminds me of a story – probably an urban myth – about a student at the University of Chicago, who fell asleep in one of Milton Friedman’s lectures. Friedman was furious, and demanded the student answer whichever question he had just asked. The student responded “I don’t know the question Professor Friedman, but the answer is a change in the money supply”. It’s a funny joke, until you realise that economists (in this case Irving Fisher*) actually write things like this:

Economistslol

There you have it, folks: belief in socialism is a monetary phenomenon. This is despite the fact that Russia, the centre of Bolshevism, wasn’t really capitalist at the time of its revolution but mostly feudalist, making Fisher’s discussion of workers and employers bargaining largely irrelevant. It was actually the increasing scarcity of land and food – not the instability of money – which robbed peasants of their lot. Fisher’s account also ignores the undeniable role of World War 1 (elsewhere as well as in Russia), which devastated large areas of the country and created an armed, disenchanted underclass accustomed to conflict. Contrary to what Fisher implies, I’m pretty sure that an oppressive regime drafting you for a largely pointless war, or taking away what little you have, does not only “appear to be social injustice”, but is social injustice, and is peripheral to “changes in the buying power of money”, itself usually symptomatic of broader instability – economic or otherwise.

An economist does sociology (and more)

Perhaps nobody better characterises the term ‘Economic Imperialism’ than University of Chicago economist Gary Becker. Becker has used economist’s toolkit to craft theories for everything from crime to addiction to the family, and in fact he won the Sveridges Riksbank Prize for his efforts (yes, it’s a fake Nobel yada yada). Naturally, Becker’s models were praised because they were rigorous and mathematical (a quick google search will reveal multiple people fawning over him for god knows what reason). While Becker himself is quite modest and seemingly well intentioned, his theories about human behaviour are so far from the truth it’s a wonder they have garnered any respect at all.

The first of these, Becker’s theory of ‘Rational Addiction‘ (amusingly parodied in this video), suggests that those who are addicted to drugs are just following a rational long term utility-maximisation plan. This is the sort of thing that a normal person looks at and goes “erm, no”, as it is completely at odds with the internal and external struggles that addicts commonly face. “I’m just maximising my satisfaction” sounds like something an addict will tell you, but analysis of addiction generally has to go beyond that to be of any use.

It almost goes without saying that do not plan their addiction because they think it will maximise their future satisfaction, and is well established people in general do not behave this way. Some economists have tried to use vague data points – such as the evidence that smokers adjust their habits due to expected tax increases – to ‘show’ people are rational and forward looking. However, it is obviously a leap from this highly stylised behaviour to suggest that smokers are perfectly rational and informed forward looking utility maximisers. In fact, the observed behaviour of addicts suggest that addiction is generally involuntary, and people become addicted because they are unaware of, or underestimate, the risks of addiction. Often it is not clear why people are addicted, even (or especially) to themselves.2

On top of this, the actual mechanics of addiction used in the theory are questionable. ‘Rational addiction’ occurs because past consumption of something builds up a ‘stock’ (with typically undefined units), increasing the pleasure you get from consuming it now. However, in the real world addiction is far more complex than this, and is associated with numerous, sometimes conflicting effects. For example, the theory of rational addiction cannot explain the ‘empty compulsion’ addicts feel once the brain has adapted or become satiated, resulting in a disappearance of the ‘high’, but not of the desire to continue, even if the addict’s conscious brain conflicts with this desire. What’s more, different drugs create different reactions inside the brain (not to mention psychological reactions): opiates like heroin tend to mimic certain neurons, whereas alcohol inhibits the brain’s ability to release (and coordinate the release of) neurons. These are disparate processes that cannot be captured by economist’s utility. Conversely, neurologists, psychologists and social workers have models that can explain such nuances, which are certainly the ones I’d turn to if I wanted to understand and deal with addiction.**

Becker’s second major theory of human behaviour is New Home Economics, or the theory of the family, which started with Becker’s 1965 paper on the allocation of time and culminated in his 1981 Treatise on the Family. As would be expected, the theory models families as a collection of rational agents optimising various preferences and operating according to their respective specialisations, and so it can easily be criticised along previously mentioned lines. However, I will not go over these arguments again.

Instead, the critiques I find of interest here are those by feminist economists, who generally take issue with Becker’s almost hilariously stereotypical depiction of the family. The head of the household – implied to be a man – is modeled as an ‘altruistic’, breadwinning agent who coordinates everything and makes sure it is OK, while the rest of the family accept his judgment as in their best interests (in other words, he is a benevolent dictator). Housework is done by the woman (as women have a ‘comparative advantage’ in housework), and is not counted as a contribution to the family pot, implying that said work is not similarly ‘altruistic’. One is forced to wonder whether the theory would be more suited to the 18th or 19th centuries – clearly, it precludes the study of non-traditional families. A real household that looked like this would probably be classed as abusive.

The theory has many other conceptual and explanatory problems. It could be viewed as an attempt to deal with the troublesome existence of the family unit by arguing it can be represented by a single optimising agent, similar to the way some perfectly competitive models deal with the firm. Economist Barbara Bergmann noted that the theory seems to lead to the “conclusion that the institutions depicted are benign, and that government intervention would be useless at best and probably harmful.” Yet this depiction is completely at odds with the obvious fact that families often exhibit conflicting or self destructive behaviour. Bergmann goes further, arguing that Becker’s theory more generally leads to “preposterous conclusions”, among which is the ‘economic argument’ that women should embrace polygamy, and the idea that the decision to have children is only a function of parent’s ‘altruism’ and of the rate of interest. While the theory may be vaguely consistent with a few stylised facts about how income affects families, these are largely trivial and do not need Becker’s theory to explain them.

The third and final theory is Becker’s theory of crime, which unsurprisingly argues that criminals simply perform crimes because the benefits outweigh the costs. Criminals were said to calculate the ‘expected utility’ of a crime, which multiplies the probability of being caught times the price for being caught. Becker’s cost-saving solution was to increase penalties but reduce enforcement, and also to increase enforcement of more costly crimes (which, in practice, means increasing enforcement in wealthy areas and decreasing it in poor areas).

To be fair, Becker always warned against implementing an extreme version of his view, but as is often the case the caveats were not taken on board and ideas like his seemed to have a substantial (negative) impact on law enforcement (the fact that Becker has a blog with notable judge Richard Posner should be a clue that he has an influence on the legal profession). Over the 1970s and 80s, law enforcement seemed to follow the Chicago-style prescriptions: punishments were increased, with mandatory sentencing introduced and incarceration rates rising. Meanwhile, particularly in cities, the number of police officers was reduced, as was general enforcement and surveillance. The well-documented wave of crime that followed/coincided with this, culminating in the late 1980s, led to the realisation that this approach was flawed, at which point different approaches to law enforcement were taken and crime started to go down. (I’m not going to go over the Freakonomics abortion explanation for this, though this paper has been acknowledged to show that at the very least the effect was smaller than they thought).

Criminologists generally find that combating crime requires the opposite approach to the one Becker had in mind: frequent enforcement, modest penalties (note: commenter ‘TheHobbesian’ helpfully provides a link to ‘situational crime prevention‘, which is apparently gaining followers). It turns out that real criminals are not so bothered by the punishment for a crime, within reason, but by the likelihood of being caught. Most criminals do not even consider the punishment at all when committing a crime, particularly because many of them are under the influence of drugs when they do it. What’s more, punishments that are too severe can backfire, either because they end up being impossible to enforce or because, if a punishment is severe enough, a criminal may as well commit a more heinous crime. I expect an economist like Becker might respond that this just shows that criminals have ‘interesting utility functions’. I would respond that they need to get a grip on reality.

Conclusion

Economists are prone to thinking their framework is neat, useful and even universal, but actually it is just quite a naive and one-dimensional view of human behaviour. When economists take their toolkit to other social sciences, they’d like to believe that they ‘simplify’ in such a manner that they get to the ‘underlying’ mechanics of issues; but they actually ‘simplify’ in such a manner that they often assume everything relevant away. This may make for compelling mathematics and entertaining books, but when we actually venture out into the real world these theories at best only to touch on the surface of the story; at worst, they simply become absurd.

Footnotes

*This is from Fisher’s book The Money Illusion. The chapter in question is fully available online here, and no, it doesn’t look any better in context.

**A part of me says that someone like Becker probably wouldn’t rely on his theory, either. There is a joke about an academic economist who was offered a position at another university, and was conflicted about the choice. One of his students asked him why he didn’t simply choose the rational option. Puzzled, the professor responded “come on, this is serious”.

References

1. Crime, Cultural Conflict, and Justice in Rural Russia, 1856-1914 by Robert Frank, pp. 6-7

2. The Theory of Addiction by Robert West, pp. 32-36, 75

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  1. #1 by caseyjaywork on August 29, 2013 - 6:16 pm

    This is awesome. I want to press a Like or Favorite button, but don’t see one.

    • #2 by Unlearningecon on August 29, 2013 - 7:45 pm

      Thanks. There definitely is one, as people have favourited/liked my posts before, but it’s obviously quite elusive as I cannot find it either.

  2. #3 by Robert Nielsen on August 29, 2013 - 6:16 pm

    I’ve only heard of Gary Becker’s theories on discrimination and crime which are completely absurd, but his theories of the family and drugs are just as daft. It seems the more I hear about him the sillier I view him.

  3. #4 by AgroEcoProf on August 29, 2013 - 6:36 pm

    Reblogged this on AgroEcoPeople.

  4. #5 by Steve Reilly on August 29, 2013 - 7:10 pm

    Where in Irving Fisher’s analysis is it necessary that Russia be capitalist and not feudalistic?

    • #6 by Unlearningecon on August 29, 2013 - 7:13 pm

      This is nitpicking as there are far more important points, but he repeatedly speaks of wage bargaining between employers and workers, which obviously didn’t take place between landlords and peasants.

      • #7 by Jan on August 30, 2013 - 10:23 pm

        Great piece on Funny economics statements, unlearning-,well old . John K. Galbraith was at least aware of the fun he wrote , like in this oneliner :
        ““Economics is extremely useful as a form of employment for economists.” :) !Keep the good work up mate !

      • #8 by Unlearningecon on August 31, 2013 - 12:45 pm

        Hmm, there seems to be a problem with which comment people’s comments attach to. Odd.

        Anyway, yeah that’s a great Galbraith comment. I rack my brains for some new and interesting conclusions economists have given us that haven’t proved disastrous. I believe Imre Lakatos invited Milton Friedman to contribute to his journal to take up this question, but Friedman never took the opportunity.

      • #9 by Jan on September 6, 2013 - 5:13 am

        “Neoclassical theory is based on the assumptions that are a combination of mechanistic analogies of positivism, behaviorism, utilitarianism, and reductionistic methodologic individualism, each one is contentious issues in the philosophy of science. Their combination is probably unmatched in terms of logical inconsistencies and unrealistic starting point in today’s social sciences.” as Professor Joachim Israel
        put it in Klappjakten på välfärden,1993,

  5. #10 by Steve Reilly on August 29, 2013 - 7:28 pm

    Yeah, if I screwed up that badly I’d resort to “nitpicking” as well. Where does he say that in the part about Bolshevism?

    • #11 by Unlearningecon on August 29, 2013 - 7:43 pm

      Here’s a tip: before you try to discredit someone’s argument, first do your research so you don’t embarrass yourself. I actually provided a link to the full passage, which you could have read had you not been so eager to make out I was wrong:

      But, whether justified or not, popular discontent always follows in the wake of inflation or deflation. When the price level rises rapidly the laborers rightly feel themselves to have been victimized, and the more radical among them come to hate society. As inflation goes on, the workers grow continually more dissatisfied and attribute their plight to an intentional plundering by a social system of “exploitation.”

      Out of such discontent, therefore, come Bolshevism and other radical theories. Lord D’Abernon, during the World War, said that Bolshevism was caused largely by changes in the buying power of money. It is a crude effort to rectify what appears to be social injustice. And at least part of this social injustice is real, namely, that part caused by unstable money.

      LABOR TROUBLES

      Even the most reasonable workmen as well as the most reasonable employers are apt to get into disagreements because of unstable money.

      Unstable money is, as Lord Vernon has well pointed out, a chief cause of bad industrial relations.

      When the price level is rising the workmen complain, as we have seen, of the high cost of living and demand higher wages. This is a reasonable demand, but the employers are likely to resist, especially if they have a long-time contract or understanding with the workmen. A strike is often the result of the difference between these two viewpoints.

      When, on the other hand, the price level is falling the employers try to reduce wages. This also is reasonable, but the workmen are almost certain to resist, especially if they have a contract or understanding to their advantage. A lock-out is likely to result.

      It is clear Fisher is talking primarily about the effect “unstable money” has on capitalist work arrangements, and hence that his arguments do not apply, at least in the form he puts them, to feudalism.

      • #12 by Draco T Bastard (@DracoTBastard) on September 6, 2013 - 11:25 pm

        The real important aspect of what Fisher wrote there is that he’s assuming that there is nothing wrong with the social system.

      • #13 by Unlearningecon on September 14, 2013 - 3:33 pm

        I was reading part of a book on market pricing by Israel Kirzner, and came across a passage that assumed, as a starting point for the analysis, that nobody was unhappy with the system in place. It was tucked away, but it seems like economists tend to view political discontent as outside their models and capitalism, rather than a direct result of the processes they are modelling.

    • #14 by Jan on August 31, 2013 - 11:46 pm

      True Unlearning.And as to qoute old John Kenneth Galbraith again – “Milton Friedman’s misfortune is that his economic policies have been tried.” :) !
      And as you shown in your other excellent writings on Uncle Milton he had a bad habit to invent facts,correlation and numbers on standing foot out of nowhere so to say :). I don´t think you get away in with such with a guy like Imre Lakatos.But the story goes something like like this:

      In August 1972, a case study of the methodology of neoclassical economics by Lakatos’s London School of Economics colleague Spiro Latsis published in The British Journal for the Philosophy of Science found Milton Friedman’s methodology to be ‘pseudo-scientific’ in terms of Lakatos’s evaluative philosophy of science, according to which the demarcation between scientific and pseudo-scientific theories consists of their at least predicting testable empirical novel facts or not.Latsis claimed that Friedman’s instrumentalist methodology of neoclassical economics had never predicted any novel facts. see (Situational Determinism in Economics S.J Latsis The British Journal for the Philosophy of Science, 23, p207-45.)

      As Editor of the Journal Lakatos had been primarily responsible for its contents since August 1971.
      In defense, Friedman wrote a three-page letter to Latsis in December 1972, counter-claiming that the neoclassical monopoly competition model had in fact shown empirical progress by predicting phenomena not previously observed that were also subsequently confirmed by empirical evidence.

      The example he gave was a prediction of Chamberlain’s monopolistic competition model that “the standard explanation for the Standard Oil monopoly was wrong”, which he said had been theoretically predicted by Aaron Director, his brother-in-law, and empirically confirmed by Magee.

      Lakatos invited Friedman to submit a discussion note based on his December 1972 letter to Latsis for publication in a symposium on the issue of the scientific status or not of neoclassical economics.

      So you are right Unlearning, Friedman never took up the invitation.Why is hard to tell but i guess on could figure it out by read your articles about the man!.
      But he seem to still be a Guru to many,which is to me a real strange thing to understand!!
      Have a great late-summer weeek Unlearning!

  6. #15 by Ramanan on August 29, 2013 - 7:59 pm

    Freakonomics: “Economics is a science with excellent tools for gaining answers but a serious shortage of interesting questions”.

    • #16 by Unlearningecon on August 29, 2013 - 8:04 pm

      Seems to me one “interesting question” they could answer would be “how does the economy work?” I mean, we should at least give that a try before opining on other disciplines.

      • #17 by Ramanan on August 29, 2013 - 8:20 pm

        Yeah that is the attitude of the Freakonomics guys – pretense that they understand everything and just solving some “puzzles”.

    • #18 by Steve Reilly on August 29, 2013 - 8:04 pm

      I did read it and I’m not embarrassed. When Fisher talks about Bolshevism, he talks about changes in the buying power of money. If you want to drag in another section of the paper to talk about capitalism, knock yourself out. But pretending that you prove that Irving Fisher thought that pre-Soviet Russia was capitalist by doing so is laughable.

      • #19 by Unlearningecon on August 29, 2013 - 8:14 pm

        I have not “dragged in” another section, considering that even in the picture Fisher argues that “workers attribute their plight to..exploitation”. That seems to me to be a clear reference to marxist theories and links his argument in with the subsequent section.

        But pretending that you prove that Irving Fisher thought that pre-Soviet Russia was capitalist by doing so is laughable.

        I have not said that I’ve “proved” anything of the sort, but Fisher must surely have a warped view of what went on in pre-revolutionary Russia. As I said, neither his arguments about workers or his arguments about the buying power of money could be said to apply – the soundest money in the world wouldn’t have altered the dwindling availability of land.

      • #20 by Mysjkin on August 31, 2013 - 10:20 am

        To be fair, the biggest support for the revolution came from workers in the big cities. But that doesn´t make Fishers argument valid.

  7. #21 by marksadowski on August 29, 2013 - 9:23 pm

    “There you have it, folks: the Russian Revolution was a monetary phenomenon. This is despite the fact that Russia wasn’t really capitalist at the time, but largely feudalist, and it was the scarcity of land and food, not money, which robbed peasants of their lot. It ignores the undeniable role of World War 1, which devastated large areas of the country and created an armed, disenchanted underclass accustomed to conflict. Contrary to what Fisher implies, I’m pretty sure that an oppressive regime drafting you for a largely pointless war, or taking away what little you have, does not only “appear to be social injustice”, but is social injustice, and is peripheral to “changes in the buying power of money”, themselves symptomatic of broader instability – economic or otherwise.”

    It’s not clear to me why monetary phenomenon can only exist in capitalist societies.

    Furthermore Russia’s monetary problem during WW I, as was the UK’s, Germany and France’s, was not too little money, but too much money, in the form of excessive inflation.

    Fisher isn’t claiming that inflation caused the Russian Revolution. He claims that during WW I Lord D’Abernon said changes in the buying power of money caused Bolshevism. While Bolshevism is obviously identified with Russia, at the time that Lord D’Abernon made that statement, which was actually in 1919 after WW I, Bolshevism was used as a more general term to refer to Communism, especially as at that particular time, Germany was still in the grips of the November Revolution. A newspaper report on Lord D’Abernon’s speech makes it clear that he was talking about more than Russia, or even Bolshevism, as he was also referring more generally to “labor troubles” throughout Europe:

    http://query.nytimes.com/mem/archive-free/pdf?res=F00B15F7345F157A93C6A9178ED85F4D8185F9

    • #22 by Unlearningecon on August 29, 2013 - 9:48 pm

      I think you are right that I misinterpreted Fisher somewhat as arguing about the Russian Revolution in particular, rather than Bolshevisim in general. However, the arguments still apply: social discontent and fears about ‘exploitation’ aren’t simply due to unsound money, as there are far more important phenomena going on. Russia is the prime example of this.

      It’s not clear to me why monetary phenomenon can only exist in capitalist societies.

      Well, as I say, the problem in Russia was that the population was growing and land was becoming more scarce, which didn’t really have much to do with money.

      PS After debating it, I have changed the text slightly to make it a fairer interpretation of Fisher.

      • #23 by Roman P. on August 30, 2013 - 10:47 am

        It’s actually even more complex than that. What was a single historical event (February Revolution) could be conceptually represented as a number of parallel social revolutions:
        1) The coup of the high military command and aristocracy against the Emperor;
        2) The rise of the bourgeois class, gaining a majority in the new Provisional government;
        3) The explosion of unrest among the (city) proletariat;
        4) The revolt of peasants who had started to take the land by force (‘black repartition’)

        Arguably, the 1) and 2) had nothing to do with money supply and everything with crumbling institutions of monarchy and aristocracy. Peasant uprisings were concerned with land, their greatest treasure, but as they happened in the country (as opposed to cities) they were sort of divorced from the current political events. What happened in the cities was about a lot of things, including the war, food shortages, rise of political radicalism, etc (re Hobsbawm). In some sense there was a problem of wartime disbalance between the ‘town’ and the ‘village’ since the peasants (those that weren’t killed by Germans and Austrians, that is) were relatively well-off due to high demand for agricultural products and corn price speculation, while the town- and city folk suffered from lower real wealth due to the hardships of war. But the problems of food shortages could hardly had been repaired by just regulating the money supply. The country was just crumbling under the stress of war.

      • #24 by Unlearningecon on August 30, 2013 - 12:08 pm

        Thanks for your comment.

        Arguably, the 1) and 2) had nothing to do with money supply and everything with crumbling institutions of monarchy and aristocracy.

        ‘Arguably’ ? :)

        I think Fisher might have more of a point than I initially gave him credit for, in that he is referencing hyperinflation, particularly in Germany. I don’t think that is a monetary phenomenon at all, but it is in many ways a reasonable position to argue it was. Having said that, it’s still pretty silly to think that marxist ‘exploitation’ theories stem simply from hard economic times and not something more fundamental, and to ignore the role of things like war.

      • #25 by Roman P. on August 30, 2013 - 12:49 pm

        Well, I prefer to not make excessively strong statements. Who knows what all those people who made the February revolution were thinking. I doubt that the likes of Milyukov ran on “The money is too loose GOTTA OVERTHROW TZAR” logic, though.

  8. #26 by Cameron Murray (@Rumplestatskin) on August 30, 2013 - 2:27 am

    Top stuff again mate.

    A few of points
    1. Becker’s theories of family don’t actually explain nuclear families, only potentially the existence of households as a general idea and the efficiency of specialisation within a small unit.
    2. There seems to be plenty of rewards in economics for applying the economic toolkit (the maths of optimal control) to other areas to find ‘innovative results’. When I presented a model of group formation within social networks recently to a room of economists question included “what is the equilibrium”, and “in what way is this a model” – implying a model is unacceptable without an equilibrium, despite while fields emerging in agent-based modelling etc. The toolkit of the profession is not the enabler it should be but a very real constriction on thinking.
    3. One of my favourite examples of economists saying funny things, but in an area they should be experts in – health insurance.

    http://www.macrobusiness.com.au/2012/02/model-vs-reality-in-health-care-funding/

    • #27 by Unlearningecon on August 30, 2013 - 11:58 am

      Thanks!

      1. I understand that Becker argued the terms ‘he’ and ‘she’ were just labels, but let’s be serious: if the theory has anything to do with the real world, the breadwinner is the man. Furthermore, Becker is on record as implying/asserting something to the effect that women have a comparative advantage in caring for kids etc.

      2. Sometimes I think I am being too harsh on economists. Then I hear stories like this. I’m guessing to them a ‘model’ means microfoundations or something similar?

      3. As I said to Ramanan, it seems economists should get a better grasp of economic issues before they apply their toolkit elsewhere.

  9. #28 by Rizwan on August 30, 2013 - 4:42 am

    Hilarious, enthralling and informative. Keep it up sir!

  10. #30 by Luis Enrique on August 30, 2013 - 10:55 am

    This is a more measured assessment of Becker’s contributions to the economics of families, but a long-time critic of his work

    http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.197.119&rep=rep1&type=pdf

    on crime, if you say the probability of getting caught matters the most, you are not exactly refuting the idea that costs and benefits matter. To may mind it sounds like the costs are nonlinear, something like costs equal: getting caught + punishment^alpha

    where alpha<1 means that increasing the punishment has diminishing impact, and where simply getting caught is a large fixed cost. So the idea that you can reduce the probability of getting caught but offset it by increasing the probability of punishment wasn't very smart. With non-linear costs, you'd have to do something really crazy, like execute people for shop lifting, to offset reductions in the prob of getting caught.

    on the non-nobel tedium

    this is from the nobelprize.org

    “The Prize in Economic Sciences in Memory of Alfred Nobel is awarded by the Royal Swedish Academy of Sciences, Stockholm, Sweden, according to the same principles as for the Nobel Prizes that have been awarded since 1901.”

    so the Royal Swedish Academy of Sciences decide on who wins it. And who chooses the “real” Nobel prizes? let’s see now, Physics – oh look it’s the Royal Swedish Academy of Sciences.

    So it’s a prize awarded by the same people on the same principles. But yes, terribly clever to refuse to call it a Nobel prize, well done.

    • #31 by Unlearningecon on August 30, 2013 - 12:03 pm

      With non-linear costs, you’d have to do something really crazy, like execute people for shop lifting, to offset reductions in the prob of getting caught.

      Well, evidence on the death penalty deterring crime is mixed at best. But aside from that, this is where we would start getting some of the ‘backfiring’ effects I spoke about about. I just think it’s more complex than Becker’s model implies.

      I would suggest that two of the points I present conflict directly with Becker’s approach:

      (1) The point that changes in punishments often seem to have no effect at all, and many criminals don’t even know the punishment for a crime;

      (2) The point that most criminals simply do not think they will be caught, or are too much ‘under the influence’ to care.

      On the Nobel tedium: well, the prize has been protested by member’s of Nobel’s family and also the other sciences. I think calling it a ‘Nobel’ is quite disingenuous as we simply cannot say it was what old Alfred had in mind. FWIW, I think the peace prize is also a joke, though for other (obvious) reasons.

      • #32 by Luis Enrique on August 30, 2013 - 12:15 pm

        these two claims

        “what matters is not the punishment for a crime, but the likelihood of being caught”

        “most criminals simply do not think they will be caught”

        do not sit easily together. Of course much crime is thoughtless impulse or whatever, I doubt Becker would deny that. At the same time, I think it’s daft to ignore the role of costs and benefits. You like Dillow, here he is on the topic

        http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2007/02/economics_of_cr.html

        http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2011/11/criminals-like-us.html

        http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2013/04/endogenous-morality.html

        personally I suspect if the death penalty was introduced for, say, speeding, it would have an effect. So maybe we need to distinguish between crimes that are generally committed in moments of rage, and other varieties of crime, before talking about the effects of varying punishments.

        How long are we supposed to worry about what Alfred “had in mind”? Should we still care in the year 2500? The word “Nobel” now refers to a bunch of prizes handed out by Swedes, like the word Hoover can refer to vacuum cleaners that aren’t manufactured by Hoover and only pedants complain about that.

      • #33 by Unlearningecon on August 30, 2013 - 12:46 pm

        Yes, I put that badly: if you decrease enforcement by enough, criminals will simply not think they will get caught, which is why inner NYC was absolutely ridiculous in the 1980s – something like 8/10 residents had been mugged. However, if you increase enforcement and surveillance (like stop and frisk, which is illiberal but does seem to reduce crime), criminals will be much more cautious, even if the punishments are modest. I guess you could put this into some kind of nonlinear utility function but, as always, I would question the need for such a thing, and there are also other problems with the approach.

        personally I suspect if the death penalty was introduced for, say, speeding, it would have an effect.

        I think people would fight tooth and nail against it if caught or simply not believe it would be enforced. Obviously it would not be at all acceptable politically. The criminal justice system is malleable and performed by humans, and people can act based on this. That makes the effect of any punishment ambiguous.

        Actually the one area I don’t like Dillow is when he starts saying things like “the rioters acted based on costs and benefits”! It’s worth noting that we are talking about incommensurable phenemona, here. How do we ‘value’ a prison sentence? A beating from a police officer? Or the ‘culture’ and ‘morals’ Dillow references? It might work for a very narrow group of crimes, like stealing a TV for which you will be fined, but for the most important crimes costs and benefits are not really a coherent way to talk about things.

        I also don’t think Dillow’s Beckerian interpretation of that experiment was a particularly strong one, and his overriding point about social forces seems to be against it.

      • #34 by Luis Enrique on August 30, 2013 - 1:56 pm

        life is full of choices between incommensurable phenemona

        yes I think the death penalty for speeding would be poorly received

      • #35 by Unlearningecon on August 30, 2013 - 2:13 pm

        That’s why I think cost-benefit is limited or at best a heuristic. Neuroscience shows that, when shopping, the part of the brain that is most active is the emotional part. Obviously our understanding of this is incomplete, but I think there is potential for an understanding that captures the truth of cost-benefit analysis, and also goes further.

  11. #36 by thehobbesian on August 30, 2013 - 4:19 pm

    Great article! Sorry I was a little late to respond to your question, but if it helps, I did finally post a response. The dominant theory in criminology which stands in opposition to Becker’s idea is “Situational Crime Prevention Theory” and it has been steadily gaining attention in legal studies. Perhaps you could add this as an addendum:

    http://criminology.wikia.com/wiki/Situational_Crime_Prevention

    • #37 by Unlearningecon on August 31, 2013 - 12:45 pm

      Hey, thanks for your comments on here and at your blog. I did a little sleuthing myself, wasn’t too difficult to find evidence on how big punishments achieve very little :)

      Anyway, I added that link to the post.

      • #38 by thehobbesian on September 4, 2013 - 2:20 pm

        Thanks! I especially liked your part about history as well. I minored in history in undergrad and I can tell you that economists have an odd relationship with the historian profession(of course, economists are often the odd men out in the social sciences in general). Most historians realize that economic trends are important to analyze when looking at history, but you also have things like trends in culture and morality which are equally important. Also, economists are of dubious trustworthiness when they do history because they all generally seem to be stumping for their particular theories and merely using history to prove them when recounting history instead of actually looking at history with the open mindedness that historians are supposed to have ( Marx and Friedman certainly are guilty of this).

        Ludwig von Mises essentially blamed the fall of Rome on high taxes and debasement of the money supply which impeded markets and created business cycles, perfectly in line with his general outlook on economics. But here’s the kicker, we really don’t have enough evidence of Roman fiscal policy to make such assertions, and we know next to nothing about market trends of ancient Rome, and we certainly don’t know anything about business cycles, if they even had them or not, or their money supply. All Mises did was assume he was correct on his view of markets, and then applied it to Roman history, conveniently filling in the gaps in the archaeological and historical records with his own theory. It is at best a weak hypothesis. Marx and Friedman did this as well. Instead of looking at history and accepting that we have a number of possible explanations for things given the gaps in the records, economists often approach history by filling in the gaps with their own economic theories. And because of this the historical community takes them with a grain of salt. And this disconnect with the mainstream community of disciplines like history and sociology is what often leads the freakonomics crowd to say that other disciplines must simply misunderstand economics, and therefore justifying economic imperialism since economists obviously know what’s up. But in reality most sociologists and historians do take these things into account, it’s just that they realize that many of the explanations given by economists simply aren’t enough to explain all of the complexities of many of the phenomena we see. Phenomena which ultimately historians and sociologists understand better than freakonomists.

      • #39 by Unlearningecon on September 14, 2013 - 3:39 pm

        That’s interesting about Mises and Rome. That kind of perspective, too, is what puts me off Marxism, though the more I learn the more I suspect that popular ideas about his crude determinism and so forth are really just straw men.

        Re: this and your comment on Walter Block, Matt Bruenig has a couple of relevant posts, one on that crowning glory of libertarianism, Hans-Hermann Hoppe, and another on how capitalism has always and everywhere been rejected because it uproots cultural, political and moral systems and subsumes them to the market.

  12. #40 by parvulesco on August 30, 2013 - 5:04 pm

    UnlearningEcon, the whole point here is that rational choice is a mere heuristic model. As Allison points out, with enough creativity and imagination it is always possible to find a posteriori a utility model which the agent in question is maximizing. In other words, it is just a circular argument, as Robinson noted: assume that the individual is always maximizing something, observe his behavior and then find something that he is maximizing.
    The problem here is when we believe a mere heuristic model to be objective reality and we call it “economic imperialism”. But for me such belief is just another form of commodity fetishism: conceiving economic relations, which are eminently social, as natural.

    • #41 by Unlearningecon on August 31, 2013 - 12:54 pm

      Yes, this is absolutely true. In the case of Becker’s theory of addiction, they made the model superficially similar with a number of things, such as ‘binging’ and ‘going cold turkey’, which occurred if you plugged in the correct parameters. But what’s the point in this? We already have illuminating explanations for these phenomena from other disciplines, why assume they should be shoehorned into an optimising framework? As I’ve said previously, it often seems like ‘being an economist’ is more of a philosophical lense through which to view the world than a real ‘science’.

      • #42 by parvulesco on September 2, 2013 - 12:31 am

        To be honest, I don’t know what the point is except if it is so “show” that Homo Economicus is actually a universal, natural reality and hence capitalism is the end of history that we all craved for.
        The same happens with Fama’s Efficient Market Hypothesis. As he recognizes, the hypothesis cannot be tested per se, but jointly with a pricing model. Then one can always calibrate the pricing model to conclude that the market is, in effect, efficient. It is unfalsifiable, so one could say that it is pseudoscientific actually.
        The whole thing of economic rationality of liberalism appears as a force of legitimation than actual science.

  13. #43 by B on September 1, 2013 - 10:37 am

    Economic imperialism? What economic imperialism? This is just Science. Thanks to a tractable general equilibrium model with rational representative agents, no money, no externalities, no public goods and no time, I can explain everything from religions to sexual behaviours. In addition, I can manage to introduce nominal frictions to make it more realistic! Don’t listen to sociologists and historians, they don’t like mathematics (and don’t understand it).

    Here is a link for you to understand why pirates were pirates : they were rational profit-seeking driven individuals. This led them to create self-regulating and democratic societies aboard their ships. Wow! Who can say now that economics is not universal?

    :-)

    • #44 by Unlearningecon on September 2, 2013 - 2:46 pm

      Hahaha oh dear, that is my new favourite example of economic imperialism, having displaced Walter Block.

      • #45 by thehobbesian on September 4, 2013 - 1:59 pm

        Walter Block took the amoral nature of libertarianism (like Milton Friedman’s “marketplace of morality” nonsense) to a whole new level by classifying people like loan sharks and pimps as “economic heroes”. Which is kind of ironic because when attacking things like Keynesianism many libertarians end up resorting to moralistic arguments about people’s dignity and having a government in charge rather than purely economic arguments. I remember reading something James Buchanan wrote in the 1970s which seemed to blame everything liberal, from hippies to homosexuals, on Keynes. That’s right, Keynesians did it, presumably from their tinkering of the money supply ;)

  14. #46 by Min on September 3, 2013 - 12:45 am

    “Becker’s cost-saving solution was to increase penalties but reduce enforcement, and also to increase enforcement of more costly crimes (which, in practice, means increasing enforcement in wealthy areas and decreasing it in poor areas).”

    Increasing penalties but reducing enforcement flies in the face not only of criminology, as you point out, but also of well established experimental psychology. The probability of punishment is more important than its severity.

    OTOH, increasing enforcement in wealthy areas sounds promising. I look forward to “Law and Order: Wall Street”. ;)

  15. #47 by JeanJean on September 10, 2013 - 10:55 pm

  16. #49 by notsneaky on September 11, 2013 - 10:08 pm

    On the Domar hypothesis, look up the so-called “Brenner Debate”. Brenner (a Marxist historian) made some of the same points you are making. More generally the way I would put it is that Domar was only considering the “demand for serfdom” (by the landowners). The costs/supply etc are not in there and you can bring in Brenner-style considerations to explain things like why serfdom re-reappeared in Russia but disappeared in Western Europe after the Black Death – for historical reasons it was a lot cheaper to impose serfdom in Eastern Europe than in Western Europe (in Brenner’s story, part of it had to do with the different ways in how villages and towns originated).

    However, this part is wrong:
    “Therefore, at worst, the Domar model is trivial: it suggests that if wage labour, serfdom and slavery are all easily available to landlords, they will choose the one most beneficial to them … However, you don’t need an economist to tell you this, and neither would they be able to tell you how such a situation arose in the first place. A historian would.”

    Saying that someone will do something if costs<benefits … sounds trivial but it's only trivial if that's all you're saying. A historian can tell you that. But what Domar actually did was to identify a potentially measurable variable (the land-labor ratio) which determines/predicts these costs of benefits. A historian might not tell you that (actually some did, like Eric Williams, the former PM of Trinidad and Tobago, who says more or less the same thing as Domar just as a historian, not an economist)

    • #50 by Unlearningecon on September 14, 2013 - 3:29 pm

      Yeah, I came across the Brenner Debate when researching this although I couldn’t seem to find a comprehensive documentation of what was discussed. Obviously bringing costs or ‘supply’ into it would make it a better model but I’m not entirely sure how you could capture something like the 3-way compact between landowners, peasants and the state with that, as it’s just too complicated and not easily reducible to mathematics.

      Your last point is a fair cop. I actually have a lot of sympathy for Domar’s approach; as I say, what bothers me is when someone like Krugman starts touting this kind of model, which is at best a starting point, as somehow the superior approach to understanding history.

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