“This book reflects my debate with myself about economic theory,” writes Ariel Rubinstein near the start of Economic Fables. “On the one hand, I am captivated by the charm of formal models: tales emerge from the formal symbols and these tales have almost miraculous powers over me. On the other hand, I am obsessively occupied with denying any interpretation contending that economic models produce conclusions of real value.” (p37)
There is, rightly, much introspection among economists at present, or at least among those of us with a heightened sense of humility and self-awareness following the crisis. This book was first published in Hebrew in 2009, so quite early in the unfolding economic crisis, but is essential reading for anybody (economist or not) trying to make sense of both the intellectual and practical status of the subject. Rubinstein is a distinguished game theorist, which makes it all the more interesting to read his reflections about what models can and cannot tell us. Others who have criticised the undue weight placed on economic models, or emphasised their metaphorical status, tend not to have come from the mathematical hard core of the profession. For example, Deirdre McCloskey, who has written brilliantly about the nature of economics and models (in How to be Human Though An Economist, for example), is an economic historian.
Economic Fables weaves together Rubinstein’s experiences in childhood and youth, his family history, and general intellectual formation and explanations of economic theory. This makes for a highly readable mix of storytelling and analysis. (I must add, it’s a very nicely designed book too – I have the physical book with a great cover photo and nice format, easy to pop into a bag or pocket. It’s from Open Book Publishers so there is also a low-cost pdf version and multiple e-book versions.)
Some of the author’s points are familiar to thoughtful economists. For example, like McCloskey and Ziliak, he attacks the over-reliance on the totem of ‘statistical significance’ by people who give not thought to the way statistics are collected, measurement errors, and meaning. (p83). Yet this point bears constant repetition as young economists are not taught this at university. Other points were new to me. For instance, I was struck by the observation that in assuming people behave ‘as if’ they are optimising, we can glide over the strong assumptions on which economic models are based, and the welfare conclusions drawn from them. (p53)
I also particularly enjoyed Rubinstein’s meta-analysis of game theory experiments. He has conducted many online polls posing thousands of students game theoretic questions – how do they respond to classic ultimatum or traveller’s dilemma games, for example. According to the polling, those who have studied game theory tend to choose the equilibrium solution, ignoring the reality that most people have not studied game theory so the actual outcome will be different, and one would be better off choosing a ‘natural’ rather than an ‘equilibrium’ answer.
So, all in all, this is a great book for economics students, giving a clear introduction to some basic models and just as important to some important advice about how to use models, and how not to use them. The book has a terrific website where readers can try out some of the exercises. I would definitely use this if I were teaching. It is also a very enjoyable and thought-provoking read for practising economists, not to mention for all non-economists trying to pin down why they think economics has failed them during the crisis.