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Wednesday, August 06, 2003

Profiles in Economics

Both William Sjostrom and Stephen Karlson have good comments on a generally good profile of the University of Chicago economist Steven Levitt in the New York Times Magazine. I have a different quibble, with the following statement:

The greatest change, however, is within the scholarly ranks. Microeconomists are gaining on the macro crowd, empiricists gaining on the theorists. Behavioral economists have called into doubt the very notion of ''homo economicus,'' the supposedly rational decision-maker in each of us. Young economists of every stripe are more inclined to work on real-world subjects and dip into bordering disciplines -- psychology, criminology, sociology, even neurology -- with the intent of rescuing their science from its slavish dependence upon mathematical models.

The article later goes on to contradict this when it brings up Gary Becker, who first brought economic analysis to "unconventional" areas like crime, marraige and the family. Levitt's work is novel, but so was Becker's, and to desribe the subjects as "trivial" is to trivialise it.

In addition, behavioural economics, "the great white hope" of economics, is not quite what some of it's lay proponents, including the author, make it out to be. In his lecture to the European Economic Association last year, Matthew Rabin, the Clark medal winner in 2001 for his work in the field, explains:

People are largely self-interested. If we are allowed only one hyphenated adjective describing human motivation, "self-interested" would be my choice. But we are not completely self-interested, and the departures appear not to be economically negligible. People have some self-control and significant propensity to pursue long-run desires over immediate gratification. But we are not completely self-controlled, and the departures appear not to be economically negligible. Much of human behavior is usefully conceived of in terms of rational maximization of coherent preferences. But our tastes are not completely well-defined, stable, and coherent, and the departures appear not to be economically negligible. In all these realms, economics is not "broke" in the sense of being useless, but it should still be fixed.

Behavioural assumptions, in other words, build on neoclassical ones. The claim that it is not is akin to a similar claim made by some institutional economists, including Ronald Coase. As it happens the work in institutions, while different, novel and wonderful (I hope to take an option in it next year) is not, methodologically speaking, a different world from economics as it was before. Behavioual assumptions, while adding more "realism" to conventional models, does not look to be the revolution some think it will be.

Stephen Dubner's article is a good read, and I would recommend to anyonewanting to discover what's at the forefront of economics today. It would have been better for Dubner, though, instead of making grand claims, to concentrate on what really makes Levitt special--his penchant for asking very interesting questions, and of finding ingenious and sometimes unique ways of answering them.