I’m still reading Lionel Robbins’ classic [amazon_link id=”B0006DEH7I” target=”_blank” ]An Essay on the Nature and Significance of Economic Science[/amazon_link]. His definition of economics remains widely used: “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.” (Chapter 1, Section 3)
Later in the book, he asks whether the resulting focus on relative valuations depends on particular psychological assumptions. The answer is a firm ‘no’:
“The borderlands of Economics are the happy hunting ground of minds averse to the effort of exact thought, and in these ambiguous regions, in recent years, endless time has been devoted to attacks on the alleged psychological assumptions of Economic Science. … Economics needs ‘rewriting from the foundations up’. As might be expected, the opportunity has not been neglected.” (Chapter 4, section 4)
This of course brought the present interest in behavioural economics to mind. There’s no shortage of people now claiming that economics needs rewriting utterly. Now, I’m as interested as the next economist in Daniel Kahneman’s new book, [amazon_link id=”1846140552″ target=”_blank” ]Thinking, Fast and Slow[/amazon_link]. Recently, I attended a fascinating workshop at the Toulouse School of Economics which brought together psychologists/cognitive scientists and economists precisely because the economic crisis has underlined the need for us to evaluate the compatibility of the assumptions we make in economics with the ever-growing knowledge of how the brain works (a summary of this workshop will be published soon & I’ll link to it then). Any economist who works, as I did for 8 years, on competition inquiries will know that the rules of thumb emerging from behavioural economics do reflect behaviour in some markets better than the standard rational choice models.
However, the Robbins challenge is a good one. There are some big issues about behavioural economics and the psychological experiments on which it is based, and these shouldn’t be overlooked in the current enthusiasm. One is that sometimes behavioural models are empirically more robust, but sometimes absolutely orthodox models do better with the data – why, and when? A related point is that the behavioural rules of thumb are no less arbitrary that the conventional assumptions about aspects of psychology, an argument made forcefully by Roman Frydman and Michael Goldberg in their recent book, [amazon_link id=”0691145776″ target=”_blank” ]Beyond Mechanical Markets[/amazon_link].
Equally, some of the phenomena described in every book on behavioural economics may not be as empirically robust as supposed, as so many reflect relatively small scale experiments among groups of US college students. For example, the results of the famous ultimatum game seem to vary from culture to culture, albeit in none does homo economicus reign.
So Robbins is too sweeping in his denunciation of fashionable psychology – indeed, he sets out some psychological assumptions in the book without appearing to be aware that they are assumptions that could potentially be disproved. But those quotable lines are a useful reminder not to get to carried away by fashion.
[amazon_image id=”1846140552″ link=”true” target=”_blank” size=”medium” ]Thinking, Fast and Slow[/amazon_image]
[amazon_image id=”0691145776″ link=”true” target=”_blank” size=”medium” ]Beyond Mechanical Markets: Asset Price Swings, Risk, and the Role of the State[/amazon_image]
On reading the title of your post I was braced for a blast at BE but, as usual, your comments are reasoned and balanced.
Two quibbles.
After nigh on 40 years of growing prominence, BE can surely not be considered “just a fad”. The popularisation of some of its ideas through books such as Nudge, Predictable Irrational and even Economics 2.0 should not divert attention from the deep thinking that underlies the content of these books.
Further, I suspect you are not implying that those influenced by BE are on “the happy hunting ground of minds averse to effort of exact thought”. I am flicking through my recently purchased copy of Lowenstein’s Exotic Preferences, spying on my bookshelf Shapiro and Varian’s Information Rules and currently trying to get my head around the implications the co-existence of positional and non-positional goods outlined in Frank’s The Darwin Economy (despite the press blather, it’s not all about elk horns) and am confident there is no aversion to either effort or exact thought.
I am not sure where BE takes the study of economics but it certainly does not harm it.
These are fair quibbles. My argument is with those who think behavioural economics disproves economics, whereas of course all serious economists want to understand what psychology and cognitive science imply for our work. However, I do think Roman Frydman makes a good point about the ad hoc nature, at present, of much of behavioural economics too. Anyway, see my next post on the psychology of scarce attention…
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While I agree economics is concerned about “the relationship between ends and scarce means which have alternative uses,” I think it needs to be more broadly framed.
A few thoughts …
1. I dropped human behavior because I think that it unnecessarily constrains economics. Economics sheds light on biological systems.
2. I would suggest that economics is a collection of theories that focus on “the relationship between ends and scarce means” in the context of exchange. Whether we look at classical economics, game theory, agency theory, transaction theory, etc. the question is of confronting scarcity and allocation is mediated through exchange. The focus is not on individuals, but the total exchange or market. Assumptions are made about individuals to enable inferences about exchanges or markets.
2. 3. BE is not really economics but psychology. Much of the field evolved under the title of behavioral decision theory. The field is not describing markets but individual choices and actions. The naive assumption is that one sums individual actions and we have markets and exchanges.
4. BE has complied an impressive list of decision anomalies. There are two major material issues that have not yet been raised by BE researchers. What is the cognitive basis for the anomalies? And How do these anomalies translate in the real world into an institutional order? BE must move beyond just compiling lists of anomalies, they must explain them and embed them into markets and institutional orders. Failure to do, leaves the work as a theoretical.
These points are very interesting. I agree with you about economics as a science of social exchange relations, not individual decisions – although that makes the subject’s traditional preoccupation with individual decision theory a bit paradoxical. Partha Dasgupta in one of his methodology papers says the reason economics is so hard is exactly its concern with the interaction of millions of decisions.