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Thursday 18 April 2013

Thatcherism: The Irony of Economics


We’ve previously looked at some of the evidence that suggests Studying Economics Makes You Mean.  The general idea is that learning about the market economy and the benefits of natural selection tends to make us less generous and less empathetic towards the travails of others.

However, like so much research quoted here this only offers up part of the story. It’s possible that we’re looking at a false correlation – it may be that it’s not studying economics that makes you a nasty grasping son-of-a-bitch but that you study economics because you already are one.  And, as usual, the truth is, at best, nuanced.


One thing is sure about studying economics: it’s not easy. It’s an ad-hoc mixture of social theory, mathematics and physics with a bunch of psychology thrown in for good measure.  No half-way intelligent person ever took the subject for an easy ride.  So we know to start with that there’s an element of self-selection about economics students.

In fact, anyone who’s worked in industry for any length of time will know that there’s an general acceptance of the profit maximizing principle amongst executives.  This is almost a given, really, because how else would they ever be able to justify their behavior?  And when Raymond Gorman and James Kehr followed up a study by Daniel Kahneman, Jack Knetsch and Richard Thaler on this topic this is exactly the result that they found.  So, for instance, senior executives endorse pay cuts more often than people lower down the corporate ranking.

To investigate whether or not this type of principle is self-selecting rather than learned  Giam Pietro Cipriani,  Diego Lubian and Angelo Zago carried out a neat little study of students at the University of Verona.  In Natural Born Economists?  they examined the difference in behavior between economics and non-economics students both at the beginning of their university careers and at the end.  Their findings were unequivocal:
“Comparing economics from other students at the same university, we find evidence of a clear selection effect: from the outset economics students differ from others in their tendency to maximize profits and in their view of the market mechanism.”
Thus: economists are born not made.  In fact, the non-economics students appear to show clear selection bias against a market based system. 

Optimal and Not

Nonetheless, the researchers do seem to show some evidence that behavior is not just predetermined and that some learning takes place.  Which is good in that it indicates a university education may not be entirely pointless.  Generally, though, there’s a slight tendency amongst economics students to fall back to market mechanisms even when there are wider issues of social responsibility or fairness. 

In fact, given the world’s creeping addiction to financialization this is not insignificant as we saw in Screwed: Fictional Profits, False Accounting and Financialization.  Real world problems are rarely simple and an ideological commitment to market-driven solutions will tend to create obscure solutions which ignore wider social issues.  Economics may lead to the optimal outcome in terms of the allocation of scarce resources, but the social impact may be widespread and long-lasting.

Riotous Assembly

A case in point is the recent debate in the UK triggered by the death of Margaret Thatcher.  While her supporters celebrate her staunch defence of the individual and celebration of the free-market economy her detractors criticise the unfairness and social upheaval that her policies caused.  Although as a great many of her critics weren't born in the 1970’s and didn't experience the three day week, power cuts, rubbish piled up in the streets and mass labor unrest at first hand you've got to reckon that many of them just like a good party, preferably with a riot thrown in …

The hint that education can cause some impact on economic thinking is one that was followed up by Bryan McCannon and Jeffrey Peterson in Does Economics Education Affect Behavior?  They were particularly interested in capturing the self-selection effect, what economists, largely to confuse the lay public, call “endogenity”.

Public Goods

The experiment involved a public goods game (see Games People Play), in which participants secretly contribute money into a public pot which is then multiplied by some factor and the “public good payoff” is then distributed to all.  The best outcome is for everyone to contribute all of their cash, but oddly economic theory predicts exactly the opposite – that no one will contribute anything.  Bizarrely, if you run the math, this is the optimal outcome because any rational person will always get the best outcome by adding nothing: this is the Nash equilibrium:
“The Public Goods Game is selected because it precisely provides a tradeoff between personal wealth-maximizing choices (which some refer to as selfish or shirking behavior, i.e. free riding) and group wealth-maximizing decisions. Thus, it is an ideal environment to assess the impact on decision making.”
The results are intriguing:
“Those who choose to study economics tend to be those who are more willing to make group wealth maximizing decisions. As economics training increases, private wealth maximizing behavior becomes more prevalent.”
In essence, more economics education will tend to make people less public-spirited and more likely to decrease their contributions to the public pot.  Which suggests quite clearly that people don’t take economics because they’re mean but become mean because they take economics.

Reflexive Economics

OK, this is not as clear-cut as it seems and anyway it’s arguable about whether the outcome is desirable or not. Our economics students are clearly better able to make good financial decisions about their futures (see: Financial Education Doesn't Work, Freedom of Financial Choice is a Myth and Experience, Rare Events and Risky Choice) and that’s no bad thing in a world in which we’re all largely responsible for ourselves.  Of course, this change is partly because of a lessening of the social safety net that governments  and employers used to offer, which is happening in part because of the greater influence of economics on policy.  Like so much in the world of finance this is reflexivity in action.

However, this does rather raise the question about how influential we should allow economists to be in setting policy, and certainly argues for ensuring that decision-making should never simply be delegated to the most financially optimal outcome. 

Individual Economics

And this is as applicable to us as individuals as it is to corporations and governments.  Saving a few hundred dollars now for a better retirement may be the economically optimal decision, but if that few hundred dollars was instead spent on a day out for your spouse it may make the difference between a retirement shared or a retirement alone.

No economic decision is ever taken in isolation from the social environment.  Everyone should get an economics education; but no one should get an economics education without a balanced instruction in sociology.  These ideas change lives and en-masse are altering our world; so let’s try and ensure they’re based on something more than theories about the optimal allocation of resources.

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1 comment:

  1. Nice post. I've always felt more selfish and machiavellian when studying economics, so it's nice to see somebody actually demonstrate the effect and prove it.