A model is not terribly useful if it does not do a better job of prediction than alternative models. (Micro)economics does quite a good job of predicting human behaviour based on a very simple model of predictable rationality. It is not clear to me that this model offers a better approach to making meaningful predictions about real world human behaviour. I’ve only skimmed the article but it appears the tests are limited to rather artificial lab tests. That’s better than nothing but I’m skeptical that this model’s real world predictive power justifies its complexity.
The ‘true’ utility function of any particular human is no doubt an intractable beast of a computation but don’t be too quick to dismiss the value of assuming a much simpler utility function and assuming that people do a reasonably good job of (boundedly) optimizing for it.
Yes, I admit that it can sometimes be useful to think of humans as having utility functions, and this can be a useful model. I should have said that in the post, now that you mention it. But then one should then always keep in mind that that’s just a simplified model that’s appropriate for certain situations, not something that can be indiscriminately employed in every case.
I think they are claiming that their model more closely matches observed behaviour in certain specific controlled environments. It is a big leap from there to assume that the features of the model map in any useful way to actual features of human reasoning.
Well, at the simplest and most obvious level, microeconomics predicts how producers and consumers will respond to changing price levels quite well. It predicts that, all else being equal, a rise in the price of a good or service will reduce demand for that good or service. Do you think that prediction is wrong? Since the entire field of microeconomics is largely about how households and firms make decisions to allocate limited resources I find it odd that it is news to you that it makes predictions about human behaviour.
More generally, the impact of a change in incentives can be predicted to a useful level of accuracy by basic microeconomic analysis. By comparison to macroeconomics (admittedly a low bar), microeconomics is quite successful at prediction.
Behavioural economics has produced a lot of valuable insights. I doubt the author of the article I linked would deny that. I think however that behavioural economists sometimes make a similar mistake to the one they criticize traditional economists for making when they extrapolate the results of simple lab experiments to the real world. Just as the naive idea of a perfectly rational agent should not be taken too literally, the results of behavioural economics experiments under artificial conditions in a lab should not be applied too literally to real world decision making.
I asked about a prediction in human behavior. I am quite well aware of these predictions that are made in general, but this is in an absurdly abstract model with patently false assumptions.
It predicts that, all else being equal, a rise in the price of a good or service will reduce demand for that good or service. Do you think that prediction is wrong?
No, I think it is trivial.
Utility functions in microeconomics are not very useful for predicting human behavior contrary to what you claim. The OP was correct to look for more interesting classes of functions.
I am quite well aware of these predictions that are made in general, but this is in an absurdly abstract model with patently false assumptions.
By ‘this’ do you mean the model of humans as perfectly rational agents? That’s a caricature of microeconomics and is not necessary to make useful predictions based on microeconomic reasoning.
It predicts that, all else being equal, a rise in the price of a good or service will reduce demand for that good or service. Do you think that prediction is wrong?
No, I think it is trivial.
Maybe the simple fact is trivial but the implications are not. Microeconomic reasoning explains a number of facts that are non-obvious, counter-intuitive and non-trivial to many people, for example:
Price ceilings cause shortages (rent-control, fuel price ceilings in the 70s).
Price floors cause surpluses (agricultural subsidies, minimum wages increasing unemployment).
Purchaser subsidies cause price increases (cheap student loans raise tuition fees, mortgage interest tax deductibility raises house prices).
Low interest rates cause speculative asset bubbles and malinvestment.
Banning the sale and purchase of drugs does not work and makes some criminals very wealthy.
If more politicians and voters understood these ‘trivial’ economic facts then we might see slightly better policy. Unlikely though, since politicians’ behaviour is also best understood as a rational response to incentives.
Sorry to take so long to get back to you on this but I do think this stuff is important.
This line from wikipedia on the minimum wage really captures what I would like to say about a lot of this stuff:
Michael Anyadike-Danes and Wyne Godley [21] argue, based on simulation results, that little of the empirical work done with the textbook model constitutes a potentially falsifying test, and, consequently, empirical evidence hardly exists for that model.
The minimum wage stuff is Econ 101/ideological claim that doesn’t take into account a lot of factors. There is a lot to say about this one issue but the lack of empirical evidence is an important thing to keep in mind about economics.
I think the point about rent control is right, but I think you are leaving out positive externalities: middle class workers can live near their place of employment.
The fuel price ceilings in the 70s sounds ridiculous to me though. It turns out the price spikes were largely due to OPEC. There is much less harm if you are dealing with a monopolist/oligopolist with low cost in setting a low price.
In another comment I addressed farm subsidies. They are pernicious and many people wish they would die.
Purchaser subsidies...I went to a school with low tuition that was subsidized by the state. Student loans are not exactly the biggest factor in tuition rates so I don’t think there is much of a point to be had there. Mortgage interest tax deductions are an absurd tax break for the rich and lets get rid of them.
Low interest rates cause speculative asset bubbles and malinvestment.
That is not a result of economics but it is a favored talking point of the right who would prefer not to talk about over-leveraged-formerly-seen-as-perfectly-rational financial institutions. Low interest rates leading to inflation during times of high utilization in the short to medium term is a result of macro know as the Phillips Curve.
Bubbles almost always are the result of herd behavior which is not a prediction of economics; nevertheless they are very real.
Banning the sale and purchase of drugs does not work and makes some criminals very wealthy.
This is a complex issue. Personally I’d like to see most substances removed from the criminal justice system.
Let me first return to your first point:
That’s a caricature of microeconomics and is not necessary to make useful predictions based on microeconomic reasoning.
No it isn’t. I am quite familiar with microeconomics mathematical models and you really need some simple frameworks/powerful differentiation techniques to get far. If you are willing to throw out all talk about consumer surplus then you might get a start with a workable framework. However, this is what so many people that love hard-right econ love to tout.
Perfect rationality/information assumptions are made because they are mathematically easy. I’d love to see some bounded rationality models, but trust me that it opens up all sorts of mathematical thickets.
I used to be very sympathetic to the right-wing investor/business community and I am very familiar with their arguments. Often when they say they are arguing with economics on their side, they are arguing from a highly ideological point of view and very few people will admit/realize that.
I asked about a prediction in human behavior. I am quite well aware of these predictions that are made in general, but this is in an absurdly abstract model with patently false assumptions.
As is any model of human behavior that is tractable. All we’re really going for is prediction anyway, so who cares?
Look if econ had little influence outside its field, I would agree and say who cares. However this is hardly case.
I’m not sure I understand what you mean. Why does it matter whether econ influences other fields? Are you suggesting that people in other fields end up taking economic models too seriously? Or something else?
Well the models influencing the academy and what influences public policy are definitely not the same, if that’s what you mean. I still don’t see what you’re getting at. If anything, I think basic economic models are under appreciated. Consider mattnewport’s post for examples.
I haven’t gotten back to matt’s post, but I will. This sort of amazes me:
Well the models influencing the academy and what influences public policy are definitely not the same
Economist have a huge amount of influence in public policy and US jurisprudence. I would be shocked to hear about another set of models simply for political and judicial consumption. Often they are leaning on economists and not the original work, but they would still be using the same model in this case.
Were it not for the structure of the Senate, we wouldn’t have farm subsidies. Everybody but those from largely flat and empty states want them gone.
Wow. I replied to the minimum wage stuff a little in another post but I believe you have given me some low laying fruit.
insider trading laws
You wouldn’t only think this was a problem if you were a proponent of the strong efficient market hypothesis. There aren’t many people out there that don’t have misgivings about the weak version, much less the strong one.
income tax/capital gains tax
Hmm. I’ll let you explain further. Is it that these are less efficient than other taxes, or is it that they are the way government raise revenue?
The other ones could be interesting to debate, but I think you are a pretty serious libertarian who will not be happy unless society is organized in your way.
I replied to the minimum wage stuff a little in another post...
Where?
insider trading laws
You wouldn’t only think this was a problem if you were a proponent of the strong efficient market hypothesis. There aren’t many people out there that don’t have misgivings about the weak version, much less the strong one.
If the efficient market hypothesis false, I still think insider trading laws are a bad idea. The people with the best information about the health of a company are precisely the insiders. This is the sort of information that investors would love to have when deciding whether to commit resources to one company or another, and the sort of information which would be socially useful for investors to be acting on. None of this requires the efficient markets hypothesis, just that markets do process information, even if imperfectly.
income tax/capital gains tax
Hmm. I’ll let you explain further. Is it that these are less efficient than other taxes, or is it that they are the way government raise revenue?
Less efficient than other taxes. As a general rule, you never want to tax production—it discourages productive activities. Capital gains is different because it isn’t production per se, but savvy trading—even on the stock market—serves a socially useful function. (Yes, that means I like speculators)
The other ones could be interesting to debate, but I think you are a pretty serious libertarian who will not be happy unless society is organized in your way.
I am a libertarian, but probably not as serious as you think. Has it occurred to you that I’m mainly just reporting the collective knowledge of economists?
By the way, you still haven’t explained why you want economists to have less influence, or what you want them to have less influence on.
I am a libertarian, but probably not as serious as you think. Has it occurred to you that I’m mainly just reporting the collective knowledge of economists?
You are reporting the collective knowledge of economists as reported to you by libertarians. Most economists are not libertarians and most support the status quo. Look for a survey of economists’ opinions, eg, by Robert Whaples. They probably lean in your direction on all these issues, compared to the general public, but that does not mean they support them in absolute terms. eg, half want to eliminate the minimum wage, but half want it as is or higher.
I wasn’t aware that there was such an even split on the minimum wage, thanks. (One of the citations in the ejw article you linked to below provided the evidence)
I tried to pick items that I thought there was a general consensus on in the profession. Apparently I was wrong about the minimum wage. Looking back on my list, I would also be worried about insider trading laws (I’m sure it’s controversial), the capital gains tax, and probably the post office. I was intentionally vague about which subsidies economists would dislike because they aren’t necessarily bad (and economists don’t necessarily dilike them), but ethanol is one there is probably some agreement on. Tariffs and the income tax I’m also pretty confident in. Fannie and freddy I’m less confident in, but still pretty sure about. Note that the ejw article you linked supports my assertions about tariffs and the ethanol case of subsidies.
You seem to have no clue what insider trading laws are. Company employees and executives can purchase stock. However it is illegal to act on information that is not public.
You can look for filings to see what executives are purchasing positions in their companies. Like you say, it is good sign if people who know the company well are buying in.
You seem to have no clue what insider trading laws are. Company employees and executives can purchase stock. However it is illegal to act on information that is not public.
My point is that insider trading makes nonpublic information public.
A model is not terribly useful if it does not do a better job of prediction than alternative models. (Micro)economics does quite a good job of predicting human behaviour based on a very simple model of predictable rationality. It is not clear to me that this model offers a better approach to making meaningful predictions about real world human behaviour. I’ve only skimmed the article but it appears the tests are limited to rather artificial lab tests. That’s better than nothing but I’m skeptical that this model’s real world predictive power justifies its complexity.
The ‘true’ utility function of any particular human is no doubt an intractable beast of a computation but don’t be too quick to dismiss the value of assuming a much simpler utility function and assuming that people do a reasonably good job of (boundedly) optimizing for it.
Yes, I admit that it can sometimes be useful to think of humans as having utility functions, and this can be a useful model. I should have said that in the post, now that you mention it. But then one should then always keep in mind that that’s just a simplified model that’s appropriate for certain situations, not something that can be indiscriminately employed in every case.
I think it’s useful inasmuch as it turns “unknown unknowns” into “known unknowns.” Knowing what you’re ignoring in your approximation seems valuable.
I think they are claiming that their model more closely matches observed behaviour in certain specific controlled environments. It is a big leap from there to assume that the features of the model map in any useful way to actual features of human reasoning.
This is news to me. I’d love to hear what predictions of human behavior have been made.
The article you linked to was an absolute joke though. Behavioral economics is a much richer subject than the experiment that was being discussed.
Well, at the simplest and most obvious level, microeconomics predicts how producers and consumers will respond to changing price levels quite well. It predicts that, all else being equal, a rise in the price of a good or service will reduce demand for that good or service. Do you think that prediction is wrong? Since the entire field of microeconomics is largely about how households and firms make decisions to allocate limited resources I find it odd that it is news to you that it makes predictions about human behaviour.
More generally, the impact of a change in incentives can be predicted to a useful level of accuracy by basic microeconomic analysis. By comparison to macroeconomics (admittedly a low bar), microeconomics is quite successful at prediction.
Behavioural economics has produced a lot of valuable insights. I doubt the author of the article I linked would deny that. I think however that behavioural economists sometimes make a similar mistake to the one they criticize traditional economists for making when they extrapolate the results of simple lab experiments to the real world. Just as the naive idea of a perfectly rational agent should not be taken too literally, the results of behavioural economics experiments under artificial conditions in a lab should not be applied too literally to real world decision making.
I asked about a prediction in human behavior. I am quite well aware of these predictions that are made in general, but this is in an absurdly abstract model with patently false assumptions.
No, I think it is trivial.
Utility functions in microeconomics are not very useful for predicting human behavior contrary to what you claim. The OP was correct to look for more interesting classes of functions.
By ‘this’ do you mean the model of humans as perfectly rational agents? That’s a caricature of microeconomics and is not necessary to make useful predictions based on microeconomic reasoning.
Maybe the simple fact is trivial but the implications are not. Microeconomic reasoning explains a number of facts that are non-obvious, counter-intuitive and non-trivial to many people, for example:
Price ceilings cause shortages (rent-control, fuel price ceilings in the 70s).
Price floors cause surpluses (agricultural subsidies, minimum wages increasing unemployment).
Purchaser subsidies cause price increases (cheap student loans raise tuition fees, mortgage interest tax deductibility raises house prices).
Low interest rates cause speculative asset bubbles and malinvestment.
Banning the sale and purchase of drugs does not work and makes some criminals very wealthy.
If more politicians and voters understood these ‘trivial’ economic facts then we might see slightly better policy. Unlikely though, since politicians’ behaviour is also best understood as a rational response to incentives.
I wish the parent wasn’t downvoted into oblivion so that more people could see this!
Sorry to take so long to get back to you on this but I do think this stuff is important.
This line from wikipedia on the minimum wage really captures what I would like to say about a lot of this stuff:
The minimum wage stuff is Econ 101/ideological claim that doesn’t take into account a lot of factors. There is a lot to say about this one issue but the lack of empirical evidence is an important thing to keep in mind about economics.
I think the point about rent control is right, but I think you are leaving out positive externalities: middle class workers can live near their place of employment.
The fuel price ceilings in the 70s sounds ridiculous to me though. It turns out the price spikes were largely due to OPEC. There is much less harm if you are dealing with a monopolist/oligopolist with low cost in setting a low price.
In another comment I addressed farm subsidies. They are pernicious and many people wish they would die.
Purchaser subsidies...I went to a school with low tuition that was subsidized by the state. Student loans are not exactly the biggest factor in tuition rates so I don’t think there is much of a point to be had there. Mortgage interest tax deductions are an absurd tax break for the rich and lets get rid of them.
That is not a result of economics but it is a favored talking point of the right who would prefer not to talk about over-leveraged-formerly-seen-as-perfectly-rational financial institutions. Low interest rates leading to inflation during times of high utilization in the short to medium term is a result of macro know as the Phillips Curve.
Bubbles almost always are the result of herd behavior which is not a prediction of economics; nevertheless they are very real.
This is a complex issue. Personally I’d like to see most substances removed from the criminal justice system.
Let me first return to your first point:
No it isn’t. I am quite familiar with microeconomics mathematical models and you really need some simple frameworks/powerful differentiation techniques to get far. If you are willing to throw out all talk about consumer surplus then you might get a start with a workable framework. However, this is what so many people that love hard-right econ love to tout.
Perfect rationality/information assumptions are made because they are mathematically easy. I’d love to see some bounded rationality models, but trust me that it opens up all sorts of mathematical thickets.
I used to be very sympathetic to the right-wing investor/business community and I am very familiar with their arguments. Often when they say they are arguing with economics on their side, they are arguing from a highly ideological point of view and very few people will admit/realize that.
As is any model of human behavior that is tractable. All we’re really going for is prediction anyway, so who cares?
Look if econ had little influence outside its field, I would agree and say who cares. However this is hardly case.
I would agree with something you suggested though. We would do well do just discuss the end results and remember that the models are trash.
The real damage comes from macroeconomics and I’d agree that most of the models used there are crap—because they fail at prediction.
I’m not sure I understand what you mean. Why does it matter whether econ influences other fields? Are you suggesting that people in other fields end up taking economic models too seriously? Or something else?
Good question. I would say that does happen. Dan Drezner comes mind on this front.
I meant to say that if it had little influence outside of the academy.
Well the models influencing the academy and what influences public policy are definitely not the same, if that’s what you mean. I still don’t see what you’re getting at. If anything, I think basic economic models are under appreciated. Consider mattnewport’s post for examples.
I haven’t gotten back to matt’s post, but I will. This sort of amazes me:
Economist have a huge amount of influence in public policy and US jurisprudence. I would be shocked to hear about another set of models simply for political and judicial consumption. Often they are leaning on economists and not the original work, but they would still be using the same model in this case.
Were it not for the structure of the Senate, we wouldn’t have farm subsidies. Everybody but those from largely flat and empty states want them gone.
Apparently not enough. Consider:
minimum wage
income tax
capital gains tax
insider trading laws
fannie mae and freddy mac
tariffs and other trade restrictions
loads of different subsidies
the post office
etc.
In general, the median voter theorem is a much better predictor of policy than the “median economist theorem.”
Wow. I replied to the minimum wage stuff a little in another post but I believe you have given me some low laying fruit.
You wouldn’t only think this was a problem if you were a proponent of the strong efficient market hypothesis. There aren’t many people out there that don’t have misgivings about the weak version, much less the strong one.
Hmm. I’ll let you explain further. Is it that these are less efficient than other taxes, or is it that they are the way government raise revenue?
The other ones could be interesting to debate, but I think you are a pretty serious libertarian who will not be happy unless society is organized in your way.
Where?
If the efficient market hypothesis false, I still think insider trading laws are a bad idea. The people with the best information about the health of a company are precisely the insiders. This is the sort of information that investors would love to have when deciding whether to commit resources to one company or another, and the sort of information which would be socially useful for investors to be acting on. None of this requires the efficient markets hypothesis, just that markets do process information, even if imperfectly.
Less efficient than other taxes. As a general rule, you never want to tax production—it discourages productive activities. Capital gains is different because it isn’t production per se, but savvy trading—even on the stock market—serves a socially useful function. (Yes, that means I like speculators)
I am a libertarian, but probably not as serious as you think. Has it occurred to you that I’m mainly just reporting the collective knowledge of economists?
By the way, you still haven’t explained why you want economists to have less influence, or what you want them to have less influence on.
You are reporting the collective knowledge of economists as reported to you by libertarians. Most economists are not libertarians and most support the status quo. Look for a survey of economists’ opinions, eg, by Robert Whaples. They probably lean in your direction on all these issues, compared to the general public, but that does not mean they support them in absolute terms. eg, half want to eliminate the minimum wage, but half want it as is or higher.
I wasn’t aware that there was such an even split on the minimum wage, thanks. (One of the citations in the ejw article you linked to below provided the evidence)
I tried to pick items that I thought there was a general consensus on in the profession. Apparently I was wrong about the minimum wage. Looking back on my list, I would also be worried about insider trading laws (I’m sure it’s controversial), the capital gains tax, and probably the post office. I was intentionally vague about which subsidies economists would dislike because they aren’t necessarily bad (and economists don’t necessarily dilike them), but ethanol is one there is probably some agreement on. Tariffs and the income tax I’m also pretty confident in. Fannie and freddy I’m less confident in, but still pretty sure about. Note that the ejw article you linked supports my assertions about tariffs and the ethanol case of subsidies.
Do you happen to have a link to a Whaples survey on general economic policy issues? Everything I see is behind a subscription.
ejw is not gated.
economists’ voice is gated, but has some kind of guest access.
Let me just endorse what Douglas Knight said.
You seem to have no clue what insider trading laws are. Company employees and executives can purchase stock. However it is illegal to act on information that is not public.
You can look for filings to see what executives are purchasing positions in their companies. Like you say, it is good sign if people who know the company well are buying in.
My point is that insider trading makes nonpublic information public.
Securities law does that.
As Tyler Cowen would say, shout this from the rooftops.