Monday, May 02, 2005

More Challenges for Max

Max takes issue with my last post, and perhaps with most of the economics profession as well:

Andrew Samwick sums up everything that is wrong with economics as practiced in the nation's economics departments (as opposed to departments of urban planning, public policy, geography, sociology, political science):

"What does it mean to "see the economics" in a given situation? Economics consists of exactly two ideas: optimization and equilibrium."

Insofar as optimization and equilibrium do not explain behavior and outcomes, which is to say a ton, "economics" is useless, if not toxic. I should say that theories founded on optimization and equilibrium as employed by Steve Levitt, Samwick, and others can be illuminating, in and of themselves, but I don't think I've ever seen such a breathtakingly narrow characterization of economics.
This raises two issues that bear further comment. First, what have I left out? The challenge for Max, and anyone else who wants to play, is to enumerate other ideas in economics that are as fundamental as optimization and equilibrium that should be included in the statement. Certainly "behavior" and "outcomes" aren't ideas in the way that I have used the term (if that was the intent of including them). The Comments section is open and awaits your entries.

Second, Max has the proposition inverted. Neither Freakonomics nor my last post are an attempt to "see the economics" to the exclusion or even the diminution of other disciplines that may be relevant in understanding a given situation (unless statistical evidence bears that conclusion out). On the contrary, what Levitt has done is to show that economics (characterized by me, not necessarily Levitt, as optimization and equilibrium) is relevant in situations where it might not seem to apply: baby naming, teacher cheating, sumo wrestling, criminal activity, and others. As I noted in the previous post, this ability to spread the insights of economics into new areas has been the hallmark of the Chicago School and Levitt is its leading member in this generation.

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Max said...

You left out disequilibrium and non-optimizing behavior. You left out institutions. You left out historical context. You left out psychological explanations that are not founded on utility maximization. A sociologist once told me, "You (economists) individualize everything." So you left out group behavior. I've probably left out other things myself.

I think the sort of economics you do refer to has its uses. I also think there's a lot more to economic behavior than is revealed by optimization and equilibrium.

ed said...

1. I think that the idea of budget constraints is a third fundamental idea of economics. It may seem too obvious and trivial to matter, but in fact it has important implications, and they hold even if we don't have optimization or equilibrium (see Deaton and Muellbauer's book).

2. I don't really see that much "optimization" or "equilibrium" in most of Levitts work. It's mostly just statistics applied to interesting questions along with some ideas about incentives. I think you could drop any assumptions about optimization or equilibrium without changing most Levitts work that much at all.

rjw said...

well, if optimisation and all possible developments of the rational actor model are all subsumed into economics, then it seems to me that a lot of people in other disciplines (history, sociology, political science) have been doing a lot of economics all along without knowing it. (As these fields also make extensive use of the notion of rational behaviour)

economics certainly priviledges the rational choice model - to be sure - but to imply sole ownership seems to be going a bit too far.

At root though my objection is to characterising a field of study solely in terms of the tools and analytical concepts that it uses.

"Economics consists of exactly two ideas: optimization and equilibrium"

Why define a field of study in terms of its tools, rather than the concerns and issues with which that subject has been concerned with? I don't see the a priori justification for that.

But if you are just making the more limited case that equilibrium and optimisation are core ideas that strongly affect the way economists approach and think about issues, and that this emphasis is powerful, then you are claiming much less, and I don't disagree.

The notion of opportunity costs is perhaps a possible addition, though I guess one might consider it is already implicit. Similarly, the notion of efficiency is central, though one might consider it subsumed in optimisation (though then you have to distinguish social and private optima)

OHenry said...

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