Bryan Caplan  

Economists Are Irrational; Is Anyone Else?

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George Stigler is notorious for his dogmatic belief that any stable feature of the social world is efficient.  Since people are rational, they quickly spot and bargain around inefficiencies.  I was a little surprised, then, to read these words in Stigler's 1982 Nobel acceptance speech:
[T]here is no simple or known relationship between environmental changes and changes in economic analysis.  During the Industrial Revolution, economists adopted the law of diminishing returns but ignored the most sustained and widespread growth of output that the world had yet observed.  The vast governmental income redistribution programs of the last hundred years have only recently attracted the attention of economic theorists.  The scholars who create economic theory do not read the newspapers regularly or carefully during working hours.
While I'm a big fan of economics profession, Stigler's words ring true.  My main comeback is just: "Everyone else is worse!"  Since Stigler rules out my comeback, I have to wonder how he would have accounted for his observations.  I guess he would point to his other work arguing that policymakers and voters ignore economists anyway.  But why exactly would the people with the only analytical tools that Stigler respects be uniquely deluded?


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COMMENTS (10 to date)
George writes:

Don't worry about defending your profession. It's more important to find the current events that are ignored by economists. The things I would like studied are:
- the effects of expensive contract enforcement (legal fees are unaffordable for most people)
- intellectual property, IP owners' lobbying is very effective, will it cause gridlock?
- why aren't employers more flexible, and why is retraining a negative signal of a candidate's ability? Life expectancy is increasing, so we need to be able to change careers at 50.

ajb writes:

Because academics are not necessarily rewarded for doing useful or relevant work.

They are rewarded for work interesting to other academics in ways that promote their careers. This is only weakly correlated with "good" and important ideas. Hence the well-known adage that it is better to be interesting, original, and wrong, than prosaic, consistent, and right.

fundamentalist writes:

Here's the difference: the public is ignorant of many important economic truths. So they aren't irrational, just ignorant. They are rational about what they know. Economists, on the other hand, deliberately ignore facts they do know. Economists can't claim ignorance, which makes them irrational.

Deanna writes:

Of course economists are going to be irrational at some point in time; they are human and all people will make irrational decisions or judgments. Economists happen to use a certain kind of logic, which they can apply within their field of expertise. To others outside of this field, their reasoning may seem flawed, but it holds weight with the principles that they attribute it to, in order to explain the economic system. There may be some argument that the politicians and people in power do not give heed to the words of economists during the times that it seems most pertinent for them to do so, but they are also applying their own brand of logic to their field of politics. While both sides may be focusing on their own areas, in what appears to be an irrational manner, this irrationality could be overcome if both sides would simply listen to each other. It is a give and take kind of relationship that must be achieved.

Lord writes:

Most people are on the front lines of the economy; how they do is the direct result of how well they anticipate and react to circumstance and it aids being unbiased in this. Most economists have prior invested beliefs that bias their views and judgements and bear little cost to errors and mistakes since they are politically useful even when wrong.

Boonton writes:

Maybe I'm not reading this post correctly but I don't see the contradiction between:

"[T]here is no simple or known relationship between environmental changes and changes in economic analysis."

and

"George Stigler is notorious for his dogmatic belief that any stable feature of the social world is efficient. "

It sounds to me that Stigler is asserting that economics is a bit like physics. Certainly light, space, time and gravity didn't behave any differently before Einstein came up with relativity than after. Likewise if people are automatically finding a level of 'stable efficiency' then economic analysis isn't going to change the world, its just going to describe it better. Just like atoms don't have to wait for physicists to sort out a 'theory for everything', society goes about its stable efficiencies while economists try to come up with working theories to explain the solutions society finds on its own.

A bit more interesting IMO:
"The vast governmental income redistribution programs of the last hundred years have only recently attracted the attention of economic theorists."

If stable systems are economically efficient (let's take this as a rule of thumb) then might not economists be wrong in certain policy prescriptions? For example, redistribution, min. wage laws, modest protectionism all appear to be stable accross the board in large, developed countries. Might some of their stability rest in the possibility that they might be economically efficient in some way that eludes standard economic analysis?


Dr. T writes:

"Since people are rational..."

"They are rational about what they know."

We must live on different planets. I'm still trying to find all these people who act rationally. If your test for rationality is something simplistic such as: Someone wants to buy a box of nails, and you tell him, "Here are two identical boxes. The one on the left costs $10, and the one on the right costs $6." I am certain that everyone will pick the $6 box. That example doesn't prove that people behave rationally.

It is not rational to dislike high taxes that pay for government services and then to consistently vote for politicians who plan to increase government services. It is not rational to continually complain about one's job but do absolutely nothing to try to fix the situation at work or find a new job. It is not rational to tell your teenaged children not to do something that you do often. It is not rational to watch a 30 second TV spot on global warming and believe that you now have enough information to demand that everyone reduce use of fossil fuels. It is not rational to tell a physician that your health is very important and then refuse the prescription to walk for 30-40 minutes a day.

I could name scores of similar examples where the majority of people act irrationally. I have yet to see any situation other than the most simplistic, contrived examples where most people behave rationally. Why do so many believe the myth of rationality?

Doc Merlin writes:

@Dr. T:

1. You don't know what 'rational' means in an economic context. 'Rational', in an economic context, JUST means people have reasons for what they do. It doesn't mean their argument is sound, or that their beliefs are correct, just that they do what they do for reasons.

2. You should further explore the difference between revealed preferences and stated preferences. The person, in your example, who states that his health is important for him but refuses to exercise is either incorrect about his actual preference or doesn't really think that exercise is that important or good for his health. He is obviously either wrong or disingenuous, but hardly irrational.

Boonton writes:

Dr T

It is not rational to dislike high taxes that pay for government services and then to consistently vote for politicians who plan to increase government services. It is not rational to continually complain about one's job but do absolutely nothing to try to fix the situation at work or find a new job.

Or are you being a bit irrationally arrogant in your estimation of your ability to tell what is rational.

consider:

"Here are two identical boxes. The one on the left costs $10, and the one on the right costs $6." I am certain that everyone will pick the $6 box. That example doesn't prove that people behave rationally.

Will everyone always pick the $6 box and is that really rational? I might pick the $10 box because I don't trust the statement that they are identical. There must be some reason the store clerk wants to ditch that $6 box and I'm not going to have the roof fall down on me simply because I saved $4. Maybe it makes sense to opt for the $10 box as part of some long run social game theory. Sometimes the store owner let's me run a tab or gives me free stuff. I return the favor by sometimes not demanding the lowest possible price. All in all, if you're sitting int he store and seeing someone buy a $10 box it's irrational to declare you've discovered a niche of irrationality!

Take now your statement that it is irrational to hate high taxes but vote for people who increase services. Well is it irrational for your boss to come over and say "do more with less!"? Of course it is a bit (actually not since he is just saying 'be more productive')... I think the rational assumption is very useful but it is a lot more complicated than it appears on the surface.

Sam writes:

Why is their no simple or known relationship between environmental changes and changes in economic analysis?

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