Thursday, April 24, 2014

delusions in economics

This week, Ezra Klein reprinted an old speech given by the economist  Thomas Sargent in 2007 under the title: “This graduation speech teaches you everything youneed to know about economics in 297 words.”  Given that Sargent is a “clintonian democrat”, I don’t think Klein meant to mock the man. However, the speech is a disaster, a series of bromides that do tell us a lot about the current intellectually bankrupt state of economics. For political reasons, about 1980, economics began to experience a huge increase in prestige. Although economists have long felt that their discipline was the physics of the social sciences, few other people did. But in the era of Reaganomics, when every big newspaper was adding a business section to the sports news and ‘living’, other people began to take the physics idea seriously. Sargent does us a favor by stripping down economics to the inspirational truisms that make it apparent that this is less about physics than about Babbitry, gussied up with models.

 

I could have an enjoyable time driveby shooting at the inanities in Sargent’s “list of lessons that our beautiful subject teaches. But I’d like to take one item on the list out of line and especially maltreat the thing – no. 3: “ Other people have more information about their abilities, their efforts, and their preferences than you do.” I’m sure Sargent thinks this is an axiom with no need for proof. In fact, economists have never even tried to prove it. But in other corners of social science, this assumption has long been shown to be wholly fallacious as stated. Our self-assessments, going from the way we remember the past to the way we predict our correctness in the future, is subject to severe cognitive biases that make it the case, generally, that ‘other people’ tend to either overestimate or underestimate their abilities, tend to define their efforts in different, self-defensive ways, tend not to understand their social and economic contexts very well, and certainly tend not to line up their preferences in good transitive order a la the Arrow theorem.

 

Everywhere in the social and cognitive sciences – except in economics – the myth of the unified individual, who can be certain of his thoughts, beliefs, memories, and intentions, has been shown to be insufficient. From Freud to Prospect theory, cognitive biases and theories about the unconscious have been found whenever the laboratory met the social scientist. Sargent, who won the Nobel prize for economics in 1991, has apparently never encountered the work of the winners of the Nobel prize for economics in 2002, Kahneman and Tversky. Rather, he seems here to cling to the musings of Hayek and other ideologues of the cold war period.

 

In economic life, as opposed to economics, people aren’t that stupid. Evey advertiser knows of the parodox of parity products – that blind taste tests often show that people cannot really tell one brand of coffee, wine, or soft drink from another. Yet this doesn’t prevent the formation of ‘preferences’ – which is where advertising comes in. One of the few economists who even considered the effect of advertising was John Kenneth Galbraith, and he was roundly attacked for it.

 

I’ll end this with a quote from a 1988 study of illusion and well being:  

 

Decades of psychological wisdom have established contact with reality as a hallmark of mental health. In this view, the wcU-adjusted person is thought to engage in accurate reality testing, whereas the individual whose vision is clouded by illusion is regarded as vulnerable to, if not already a victim of, mental illness. Despite its plausibility, this viewpoint is increasingly

difficult to maintain (cf. Lazarus, 1983). A substantial amount of research testifies to the prevalence of illusion in normal human cognition (see Fiske & Taylor, 1984; Greenwald, 1980; Nisbett & Ross, 1980; Sackeim, 1983; Taylor, 1983). Moreover, these illusions often involve central aspects of the self and the environment and, therefore, cannot be dismissed as inconsequential.”

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