I normally blog about issues related to finance or distribution, but this time I thought I might try something somewhat different. I’m not particularly expert at questions of economic methodology, but found this paper to appear in the latest Journal of Economic Methodology by my very smart colleague at UMass Boston Peter Spiegler to be really interesting.
Over the last decade or so we have all had to endure (I use the term advisedly) what may be termed the ‘economics made fun’ (EMF) genre of books. The bestseller Freakonomics for example has had enormous success, selling over 5 million copies to date and launching a whole cottage industry of books (some better and some worse that blended pop culture, armchair theorizing and quantitative economic methods to come up with surprising and ‘fun’ (counterintuitive or shocking) conclusions.
And then there was the inevitable backlash as economists took to criticizing pop-econ for its oversimplification and its propensity to aim for entertainment rather than popularization of economics ideas and sometimes downright bizarre conclusions (“Do comics make cats dogs?” as the cartoon suggests is just about right). The fundamental claim made by these criticisms is that there is a no connection between what economists do in their serious work and the overstretched just-so stories told in the EMF canon.
Peter is having none of it. As his abstract suggests
Many critics of the Economics-Made-Fun (“EMF”) genre have charged that it contains very little actual economics. As such, it would seem that criticisms of EMF do not apply to economics more broadly. In this paper I take a contrary view, arguing that, in fact, at a deep conceptual level the engine of EMF analyses is precisely the engine of mainstream economics. Specifically, I argue that both EMF and mainstream economics rest on a conceptual foundation known as the Principal of the Substitution of Similars (“PSS”). Understanding how PSS leads EMF practitioners to make claims well beyond what is warranted by their analysis also offers insight into how PSS can put economists in danger of overestimating the power and scope of their analyses. I explore the consequences of such problems through examples of economic analysis of the U.S. housing market in the lead-up to the recent financial crisis.
The target here is something wider—viz. the propensity of economists to graft assumptions about behavior on objects of inquiry without assessing whether these are either defensible or useful in understanding their actual behavior. We all of course have our own favorite outlandish examples of models that seem to make some very strong assumptions about the behavior of certain subjects in order to render it legible in economese: models of torturers as maximizing information gathering subject to a retribution constraint, theories about self-interested populations choosing between ‘cuddly’ and ‘cut-throat’ capitalism by comparing long term welfare between them and so on. Peter suggests we must ask a critical question prior to such analyses in order for economic theorizing to be illuminating: how plausible is the assumption that the object of inquiry is capable of behaving in the way that the models suggest? In many cases it will no doubt be plausible, but there are equally many cases in which it will not be the case. The fact that economists sometimes pay no attention to such a question suggests what may be termed an ontological complacency in which the behavior of the object is presumed rather than discovered.
Peter locates this propensity in a particular dubious philosophical maneuver due to Jevons—the principle of substitution of similars (PSS)—that is embedded deep within much of economic thinking. While Jevons’ ideas about utility and its mathematization are relatively familiar, his conceptions about logic are less widely known. Put very simply the PSS suggests in Jevons’ words that “ Whatever is true of a thing is true of its like”. The practical implications of this principle hinge on just how ‘alike’ two things need to be in order to have this ‘capacity of mutual replacement’ (again, Jevons’ term). For reasons Peter explains in his paper, Jevons’ beliefs about the nature of the social world led him to set the bar quite low, and this made the message of the PSS something akin to ‘if two things are alike even just in superficial ways, they are alike all the way down’. If one takes the principle seriously, then there is a deep connection between the behavior of Sumo Wrestlers and School Teachers (to use Dubner and Levitt’s canonical example) since both have personal incentives, one can comfortably proceed from that front and ignore other information about their behavior.
But the same pattern of ontological complacency is present, Peter claims, in more `serious’ academic economics. His (surprising) example is of the academic literature on the housing crisis. Post facto, one can reasonably claim that the legal and institutional changes in the US had transformed financial markets transactions from facilitating the functioning of the home ownership market to a token in a rigged Casino. But for the most part that this was missed because the highly relevant classes of information available on the actual functioning of the markets from news media, lawyers and even anthropologists were not adequately examined and absorbed. As a result, Peter claims, there was a high profile failure in assessing the housing bubble.
So what is to be done? Peter’s project is to pursue a change in economic methodology in which a set of standards are established to assess how plausible it is to assume that, say terrorists are maximizing a particular expected utility function, or that new products on the market behave like the old ones. As he puts it:
Doing so will require methods that are not currently in the standard toolkit of economics. Specifically, because what is needed is a set of standards for assessing the plausibility of one’s ontological presumptions in the study of a particular set of social phenomena, the assessment standard must include the ability to entertain alternative ontologies and to understand how to read ontologies of social contexts from the perspective of the individuals that constitute that context.
How likely is it that this can be developed? How convincing is Peter’s case? I’d be curious to know what readers think.
Triple Crisis Welcomes Your Comments. Please Share Your Thoughts Below.