Friday , April 28 2017
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Beware of “thinking like an economist”

Summary:
The idea of "thinking like an economist" is, in principle, a good one. It often helps to think of the world in terms of incentive compatibility, constrained optimization, supply and demand, competition vs. barriers to entry, strategic interactions, present value, marginal vs. average effects, externalities, etc. These are all things that economists think about. And ...

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Beware of

The idea of "thinking like an economist" is, in principle, a good one. It often helps to think of the world in terms of incentive compatibility, constrained optimization, supply and demand, competition vs. barriers to entry, strategic interactions, present value, marginal vs. average effects, externalities, etc. These are all things that economists think about. And there are empirical techniques that mostly aren't specific to econ, but which empirical economists use a lot, that are also good to think about - endogeneity, omitted variables, conditional vs. unconditional probabilities, signal extraction, and so on. And it's generally cool and useful to be able to think like an applied mathematician in general - to be able to construct formal, quantitative models to represent ideas you have about the way the world works. So there are many ways that it can be useful, fun, and mind-expanding to learn to think like an economist. 

And there really are some books out there that will help you do this. Tim Harford's The Undercover Economist is my favorite of these, but there are other good ones as well. In fact, I'd like to see more of these books, dealing with more sophisticated and modern econ concepts - I think much of the general public can handle it. 

But this good stuff isn't necessarily what people mean when they say "thinking like an economist." The aura of mystique and esoteric wisdom that the econ profession was (unjustly) awarded from the 1980s through the early 2000s has, unfortunately, allowed a bunch of people to pass off lazy, sloppy thinking and pure political ideology as "thinking like an economist." 

For example, take Tom Sargent's 2007 graduation speech at Berkeley. Sargent gives what he claims is a "summary of economics", but it's mostly just a list of potential reasons to distrust government intervention in the economy. This was just free-market ideology masquerading as econ, since econ research hasn't given conclusive support to most of the assertions Sargent makes. In his book Economics Rules, Dani Rodrik backs me up on this point

As another example, take this 2003 talk by Penn State economist Russell Cooper. Here are Cooper's six basic "principles of economics": 
  1. Individuals (including households and firms) act optimally
  2. Competition works
  3. Measurement matters
  4. No free lunches
  5. Government intervention with caution
  6. Correlation is not causality
Points 1, 2, and 4 aren't even right. Individuals don't always act optimally, else there would not be a field called behavioral economics. And Cooper's justifications for assuming individuals act optimally - for example, his assertion that those who act suboptimally will be driven out of the market - are well known to be false. Competition doesn't always work, else there would not be a field called industrial organization. And "free lunches" obviously do exist in many cases; they're called Pareto improvements. As for point 5, it's just the same ideology Sargent was dishing out. 

There are plenty of examples of people, including some economists themselves, trying to pass off free-market ideology as economic intuition. Other times, people say "thinking like an economist" when what they really mean is "ignoring social norms in public discussions". 

But I think the biggest danger of the idea of "thinking like an economist" is that it promotes the idea of economists (or people trained in econ programs) as sages or gurus possessing esoteric wisdom. Smart, sensible people who are perfectly capable of thinking about incentives, constraints, externalities, strategic interactions, etc. are often at a loss when some economist (or, more often, some econ writer or think-tanker) blithely contravenes them, assuring them that if they were truly able to "think like an economist," they would see the error of their ways, but failing to explain exactly what that error actually is. 

This is what I worry about when I see Russ Roberts write something like this:
But an economist when considering a policy of banning autonomous vehicles can think of a lot of other impacts besides the jobs saved and the continuing deaths from human driven cars if such a ban is put in place. One of the things we would think about is how such a ban will effect the incentives to discover future innovation that might also people out of work. We would think about how putting more power in Washington would encourage lobbying for protection. We would think about the children and grandchildren of today’s workers and how restricting technology and changing incentives would affect things. These ideas are not rocket science. But they come easily to economists and not so easily to non-economists. Thinking like an economist is very useful.
I'm certainly not in favor of banning autonomous vehicles! But I fail to see why the issues and questions Russ raises wouldn't be accessible and even obvious to a non-economist. Does it take an economist to worry about technology bans reducing the incentive for innovation? No. Does it take an economist to worry about the power of lobbyists? No. 

Suppose someone supported a ban on self-driving cars, because they believed the disincentives for innovation and the incentives for lobbying wouldn't be too severe. Should they change their mind just because someone who claims to be able to "think like an economist" (but who presents no formal model or empirical study) says otherwise? I say no. That is placing way too much faith in esoteric wisdom. If an expert or guru can't point to some research that supports his pronouncements, you shouldn't trust that his brain just works better than yours. 

So while "thinking like an economist" is in principle a good thing, beware of people who claim to know how to do it. There's really nothing magical or esoteric about it. And if you think learning to do it means indoctrinating yourself with free-market ideology, you've been conned.
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Noah Smith
Noah has been a finance professor at SUNY Stony Brook, an economics PhD student at the University of Michigan, an academic editor in Japan, and a physics major at Stanford. He is currently hard at work on solving all the problems of the world. So don't be surprised when all your problems suddenly vanish.

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