Economics for social animals

I’ve been reading the latest book by Robert Frank, Under the Influence: Putting Peer Pressure to Work. Although I greatly admire his work, and he has a knack for catching the moment – as with Luxury Fever or The Winner Take All Society –  I must confess I found this one a bit dull. This is nothing to do about disagreeing with the idea, which is to bring together thinking about social norms, altruism, positional goods and behavioural peer effects together to tease out policy implications, or rather policy approaches. This all seems blindingly obvious to me, and indeed one of ten lectures in my public policy economics course (one chapter in my Markets, State and People) covers exactly these social influences. I agree, too, that more economists ought to be more aware of social influence: we are not isolated individuals in making choices.

There are some deep questions for economists, once you accept the seemingly incontrovertible evidence that social norms can change, advertising works to persuade us to buy things, and positional arms races occur. What does it imply for a discipline whose models and welfare analysis are based on the concept of fixed preferences? For example, the way price indices are calculated – used to calculate in turn ‘real’ growth and productivity – assumes fixed preferences; but there are constant innovations and new goods, and there is no settled way of taking these into account in dividing pounds or euros spent into price and ‘real’ components.

Back to the book, though. Yes, of course to ensuring economics and policy advice are consistent with evidenced insights from social psychology or cognitive science or evolutionary theory. Yes, of course context affects how people make economic choices. But ….perhaps it was my frame of mind this week, but Under the Influence didn’t sing to me. It seems very long-winded. In fact, the prologue claims as a virtue the repetition in the book, arguing it will help get the message to stick. Students who are not familiar with the material might really enjoy this and find it sinking in. But not one for me.

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Fracturing and building

The Age of Fracture by Daniel Rodgers was strongly recommended by one of my followees, Paul Nightingale, on Twitter and he made it sound like just my cup of tea. Which it is. It’s an intellectual history of late 20th century America, and the way the public sphere of ideas transitioned from a focus on institutions and social relations to an individualist perspective. This was most apparent in economics, which is where the book starts, but spread across many domains of policy and research – the book has chapters on race, class, gender, as well as politics in general. The hinge was the late 1970s/early 1980s, just about the time I spent four years living in the US, so reading this brought back many memories of that first Reagan term, the rise to prominence of Newt Gingrich, and the ‘declinist’ bestsellers published a few years later, Bloom’s Closing of the American Mind, Lasch’s Culture of Narcissism.

Age of Fracture is beautifully written, and I was particularly impressed by its scope – the breadth of knowledge of so many different domains is amazing. In the chapter (‘The Rise of the Market’) on the rise of abstract rational expectations economics, divorced from time, place and relationships, Rodgers gives a masterly summary of the evolution of the discipline. “The new intellectual movements in economics pushed to its limits the extent to which society could be analytically dissolved altogether into its individual utility-maximising parts.” As the chapter points out, the victory of this approach was never total, and by the end of the 1990s was moving on to a new focus on institutions, transactions costs, behaviour and networks. Nevertheless, individualism became the leitmotif of the public realm of ideas – and on the British side of the Atlantic too.

The transatlantic traffic was not all one way. The chapters on race and particularly gender emphasise the role of French post-structuralism, which swept over cultural studies and much of the humanities, and still seems to be destroying those departments. In paving the way for a sense of identity as something self-determined, it created a libertarianism of the left alongside the market libertarianism of the right. In both cases, Rodgers writes, “The libertarian vision of society was radically timeless.” Voluntary identities, voluntary transactions, are disembodied from actual history. Whether rational expectations economics or the originalist perspective on the US constitution, time – future or past – is instantly accessible. Both featured the desire to “locate a trap door through which one could reach beyond history and find a simpler place outside of it.”

The book is wisely silent on whether the climate of ideas is changing now, amid the storms of pandemic, authoritarianism rising in the US and elsewhere, social fracture. It reminded me of this comment in Elinor Ostrom’s Nobel lecture (flagged up on Twitter recently by Nicholas Gruen): “Designing institutions to force (or nudge) entirely self-interested individuals to achieve better outcomes has been the major goal posited by policy analysts for governments to accomplish for much of the past half century. Extensive empirical research leads me to argue that instead a core goal of public policy should be to facilitate the development of institutions that bring out the best in humans.”

Quite. But fracturing is easier than building. ‘Building back better’ is harder still.

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Top down *and* bottom up

Charles Stafford’s plea in Economic Life in the Real World: Logic, Emotion and Ethics, is for his fellow anthropologists to take more seriously the methodologies of two other disciplines, economics and psychology. I learned a lot about anthropology from this book, including how much anthropologists disdain economics (I fear we return indifference, on the whole).

Stafford’s argument, in a very interesting and readable book, is that the approaches are complementary: anthropologists focus on the most micro of details, while both economics and psychology are interested in generalisation about human behaviour. Intriguing to see these two bracketed together when psychology has – during the behavioural rvolution – been portrayed as a more realistic version of choice than that (assumed to be) assumed by economists – of course economists have always known that the rational choice version is not ‘realistic’.

He writes: “As a matter of routine, anthropologists accuse economists of being obsessed with ‘individual rational choosers’, but it is surely anthropolgists who are obsessed with detail.” There’s a bit of a paradox here: economics does apply methodological individualism on the whole, and easily overlooks social influences (though not entirely). Yet our concern is with outcomes at aggregate as well as individual levels. Economics is certainly universalist. It was interesting to see psychology being put in the same camp, as a universalist approach.

The plea is therefore for anthropologists to recognise that human psychology is at the heart of economic agency – it isn’t all about historical and cultural context. There is a nice chapter analysing the pros and cons of Robert Lucas’s approach to human capital and economic development, confrinted with the way people in a Taiwanese village think about the education of their children. The book ends too by pointing out that while anthropology resists quantification at all costs, the people whom the author had spent time with during his fieldwork considered numeracy and quantification to be important, not least for their economic lives.

There is surely an interaction between general human characteristics and cultural specificities. Both approaches are needed for a rounded understanding of society. I am particularly interested in the possibility for qualitative methods to inform causal inference, given that empirical identification of statistical relationships in complex systems of economic interactions is pretty much impossible. Identification needs to come from outside the model, rather than by torturing statistical correlations with dubious ‘instruments’.

Anyway, I enjoyed reading this book and welcome the anthropo-econo debate.

51Mcz+Z4MHL._SY344_BO1,204,203,200_I’ve also nearly finished Jeanette Winterson’s Frankisstein, which is terrific.

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What’s wrong – and right – with economics

I didn’t expect to enjoy Robert Skidelsky’s new book, What’s Wrong With Economics: A Primer for the Perplexed, for he has long been forthright about his low opinion of economics and economists; and so it proved.

He makes some good points, nevertheless. Indeed, some I strongly agree with, as do a lot of other economists. For example, many of us would agree about the importance of studying economic history; even some of the nerdiest econometricians and theorists I know devour the big new econ history books. Likewise about the importance of taking into account psychological realism – behavioural economics, hello! (Though standard rational calculation of self-interest often matches reality better – it’s all about the context.) Institutional economics is everywhere now, in the tradition of Coase, Williamson, et al. Lord Skidelsky approves of it (albeit preferring the old institutionalism to the new transactions-cost based approach); he just seems to be under the misapprehension that it’s a neglected part of the discipline.

In sum, there is indeed much here that I and many other economists of my acquaintance agree with. Big ticks to history, institutions, psychological realism, even to acquaintance with sociology or anthropology.

So why did I not enjoy the book? It talks about “the poverty of neoclassical economics under its carapace of techniques.” This is absurd. While certainly there is some excess ‘mathiness‘, technique is a vital thing in any discipline. Even historians have techniques, and models (‘the causes of the first world war’). Does this carapace consist of too much ‘theory’? As Beatrice Cherrier has blogged, there has been a significant shift to applied work in economics, even though its description as the ’empirical turn’ has been over-stated.

But above all, despite insisting on the importance on both economic history and the history of economic thought, the book is ahistorical in its approach to economics. It attacks an economics it labels as ‘mainstream’ or ‘neoclassical’. Whatever it means by mainstream, this isn’t what most economists do. As ever in such critiques, the book only talks about macroeconomics, doesn’t cite a single piece of applied microeconomics, but above all ignores the fact that economics has changed in the past 10, 20, 30 years.

I do think there are serious methodological issues in the present (‘mainstream’) economic paradigm – my next book, Cogs and Monsters, out around this time next year, will be about this.

Meanwhile, What’s Wrong With Economics is concise, clearly and elegantly written and spends half its length demonstrating that the other half is – well, about what’s right with economics.51FqQfM-ouL._SX325_BO1,204,203,200_

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Coffee table economics

I’ve been enjoying paging through Steven Medema’s The Economics Book: from Xenophon to Cryptocurrency, 250 Milestones in the History of Economics, not least because it has lots of lovely pictures. It’s a history of economic concepts –  that starts in 700 BCE with Hesiod to cryptocurrencies in 2009. Each entry has a beautiful illustration, no mean feat when it comes to illustrating Dynamic Stochastic General Equilibrium (a photo of the ECB), National Income Accounting (women washing dishes at home and hence not contributing to GDP), or Utilitarianism (Jeremy Bentham’s catalogue of the different sources of pleasure and pain). The pictures make it exactly the kind of book you’d be happy to have on the coffee table but it’s more than that: the selection of concepts and the capsule explanations do make it a useful starting point for people who’ve maybe read the terms or think they ought to know something about economics but have no idea where to start. They can start here without embarrassment (Hicks-Allen consumer theory, the School of Salamanca, the Shapley value….) and follow up elsewhere. It’s also a bargain – get the hardback, not the Kindle version.

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