Posts tagged with: Economic model

Blog author: jsunde
Wednesday, May 20, 2015

economicman (1)“As a social psychologist, I have long been amused by economists and their curiously delusional notion of the ‘rational man.’” writes Carol Tavris. “Rational? Where do these folks live?”

In a review of behavioral economist Richard Thaler’s new book, Misbehaving: The Making of Behavioral Economics, Tavris notes how economists are slowly beginning to see — or, one could argue, finally returning to the notion — that the discipline ought treat man as more than a mere robot or calculator.

“Researchers in this field are making up for lost time,” Tavris continues, “or perhaps realizing that they are social psychologists after all.”

As human beings who arrogantly and often wrongly consider ourselves “sapiens,” we simply don’t match the model of human behavior favored by economists, one that “replaces homo sapiens” (whom Mr. Thaler calls Humans) with “a fictional creature called homo economicus” (whom he calls Econ). “Econs do not have passions; they are cold-blooded optimizers,” he says. “Compared to this fictional world of Econs, Humans do a lot of misbehaving”—thus the book’s title.

The problem, Mr. Thaler argues, is that although economists “hold a virtual monopoly” on giving policy advice, the very premises on which that advice rests are deeply flawed. That is why “economic models make a lot of bad predictions”: some small and trivial, some monumental and devastating. “It is time to stop making excuses,” he admonishes his colleagues. Mr. Thaler calls for an “enriched approach to doing economic research, one that acknowledges the existence and relevance of Humans.” By injecting economics with “good psychology and other social sciences” and by including real people in economic theory, economists will improve predictions of human behavior, make better financial and marketing decisions, and create a field that is “more interesting and more fun than regular economics.” In that way, Mr. Thaler believes, economists will finally produce an “un-dismal science.”


Book information: The New School: How the Information Age Will Save American Education from Itself by Glenn Harlan Reynolds. Jackson, TN: Perseaus Books, 2013. Pp. viii + 106. Paperback. $21.50.

Instapundit’s Glenn Harlan Reynolds’ The New School: How the Information Age Will Save American Education from Itself is a clear and succinct, yet thorough, essay on creative destruction and American education. This slim volume (only about 100 pages) is divided approximately into 50 pages on higher education, 25 on secondary and elementary, and 25 on predictions and concluding remarks. While this might seem surprisingly brief, those of us who have been following the education crisis in the U.S. know that, actually, the problem really isn’t that complex.

As Reynolds summarizes his dean’s comments on the crisis, “Everybody knows there’s a problem; they just don’t want to talk about it because they don’t know what to do about it, and they’re afraid of what they might have to do if they did.” Very simply, what we have is a product (college degrees), whose cost has greatly outpaced inflation over the last 30 years and whose quality has plummeted, calling into question its key selling-point, viz. the idea that getting a college degree is a reliable means of upward income mobility. “The current system isn’t working,” he writes. “And, alas, neither are too many of its graduates. There may be a connection.” In the face of this, growing numbers of people simply aren’t buying the current model. (more…)

Blog author: jsunde
Friday, March 22, 2013

Tyler Cowen has an interesting column in last Sunday’s New York Times, arguing that despite run-of-the-mill objections to “cold” and “heartless” economic analysis, economics is, as a science, “egalitarian at its core”:

Economic analysis is itself value-free, but in practice it encourages a cosmopolitan interest in natural equality. Many economic models, of course, assume that all individuals are motivated by rational self-interest or some variant thereof; even the so-called behavioral theories tweak only the fringes of a basically common, rational understanding of people. The crucial implication is this: If you treat all individuals as fundamentally the same in your theoretical constructs, it would be odd to insist that the law should suddenly start treating them differently.

James Poulos offers an healthy response, reminding us that “no matter how solid the economic foundation for moral egalitarianism, there’s a thing or two of great moral significance that’s missing.”

Indeed, in attempting to avoid the cliché of cold-heartedness, Cowen risks perpetuating a different one: that economists ignore the mystery and spiritual significance of humanity and human behavior. The instilling of egalitarian sensibilities when it comes to seeing people as people is one thing, but part of this reorientation needs to include a recognition of the features that make each us different. Leveling things is helpful when the earth is rocky, but the bigger problem for the modern economist seems to be his propensity to create craters in the pretty green grass. (more…)

In a recent Reuters opinion column, Mark Thoma faults academic economists for their failure to predict the housing crash. He says their failure can be attributed to the disconnect between academia and economic forecasters. I don’t agree with Thoma, but I do think he gets it right when he says the failure of modern day economics,

May have something to do with the desire among economists to become more of a science – a heavy focus on theory and math is the result.

During the classical period, economics was closely linked to psychology. In the early 20th century, neoclassical economics veered from the study of psychology as economists sought to reshape the discipline as a natural science.

Modern neoclassical economics draws influence dating back to René Descartes. According to Dr. Robert Nelson’s review of Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Street by Tomas Sedlack, Cartesian thought encouraged a belief that mathematical equations are equivalent to religious truths. The economic man is seen as,

 ‘A mechanical construct that works on infallible mathematical principles, … and economists are [therefore] capable of explaining even his innermost motives’ through mathematical methods.

Philosophical implications suggest modern economics is essentially attempting to reduce individuals to numbers. Economic models that operate in a perfect abstract framework with absolute assumptions conflict with the unpredictable and sometimes irrational behavior of human nature. This may explain why data forecasting without a full picture of the human person is not sufficient in predicting major market failures like the housing crash.

Karen Ho takes an anthropological approach to the financial crisis in her 2008 book  Liquidated: An Ethnography of Wall Street. As an anthropology graduate from Princeton, Ho is hired to work at an investment bank and writes about the corporate culture on Wall Street prior to the housing collapse. Homogenous recruitment, constant downsizing, high risk/high reward job liquidity, short-sighted bonuses, and deception of shareholder value were among many behaviors she observed. Such irrational and risky behavior should have been a red flag for any economist, shedding light on a major incentive problem.

Though it can be argued that the separation between modern economics and behavioral economics is necessary for empirical data and analysis, some economists want to see the gap close. According to Sedlack, modern economics should deemphasize the role of mathematics. Math is only the tip of the ice berg; it is vital, but not sufficient in economics. Nelson quoted him saying,

‘Below the mathematics lie much more fundamental issues’ of institutions, culture, and basic belief — even of religion. These issues do not readily lend themselves to mathematical methods.

Some human desires simply cannot be fulfilled by economic objects. A price value cannot be placed on the community, family, knowledge of God and so on. It is impossible to commodify or quantify these desires into an economic model. Richard Neuhaus famously said,

To attribute everything to the economic factor is to perpetuate the terrible lie of the Marxists. In addition to the economic is the political and, most important, the cultural. At the heart of the cultural is the moral and spiritual.

The number one failure of modern economics is an understanding of the human person that is incomplete. Economists must draw on anthropology, sociology, psychology, philosophy, and theology to better understand what drives human behavior and decision making. Forecasters will never be able to predict the future the way they would like, but social studies coupled with empirical economic analysis may help economists better understand the why questions that numbers cannot explain.