Read This If You Want to Understand Me
Scott Sumner has a great post at his blog TheMoneyIllusion (highly recommended in general if you’re into monetary economics). In it, he explores the difference between values and worldview. In particular, he explains how academic economists tend to have liberal values but an economic, rather than liberal or conservative, worldview. This leads to interesting effects when you try to measure academic economists on the left-right spectrum.
What I loved was the list of seven differences between the “common sense” and “economic” worldviews. They are concrete examples of how economists differ in their causal reasoning from even very highly intelligent and educated non-economists. If you want to understand where I’m coming from, read the post. It’s pretty much one of the three primary planks of my own worldview. [In case your curious, the other two are that (2) the human brain is a woefully inadequate decision making substrate and (3) many of the outcomes we care about are produced by complex dynamic systems that are very difficult to characterize]
Possible Insight 
Thanks, Your blog looks really good. I should mention that most of my blog is devoted to monetary policy. I have an unconventional view of the crisis, that shouldn’t be unconventional at all. I am arguing that we have misdiagnosed this crisis in exactly the same way we misdiagnosed the Great Depression. What was initially seen as a failure of the financial system, was eventually seen as a failure of monetary policy to keep nominal GDP growing at a stable rate. My other posts discuss this. I try to do posts like the one you liked every Sunday. BTW, I am told that Bryan Caplan has already published a list similar to my 7 items.
Scott Sumner
March 16, 2009 at 6:45 pm
[cross-posting my comment to the original post]
“One interesting question is whether the best economists tend to have a more economistic worldview than the average economist.” I assume by “best” you mean most accurate in their predictions? If that’s the case, I think Tetlock should have some data on this.
Regarding the veracity or falsity of the economistic worldview, I would offer the following conjecture: It’s true on the average, but breaks down on either tail. And since more and more the systems of interest are non-normal (c.f. network effects, increasing returns, power laws, chaotic attractors), viewing them through the Gaussian lens will be less and less useful. In other words, the economistic worldview will be less and less true as time goes on. BUT, so will the commonsense view. It’s a case of something being so wrong that not even it’s opposite is true.
rafefurst
March 17, 2009 at 8:26 am
Umm, there’s nothing inherently Gaussian about the economic worldview. Yes, many of the tools that economists currently use to quantify the effects of their worldview are Gaussian. But many of them are not (e.g., Game Theory) and the ones that are are changing. It was, of course, an economist who _invented_ the Pareto distribution when examining certain economic phenomena a century ago.
So which of Sumner’s 7 points of the economic worldview do you think will no longer hold in a more extreme world and why?
kevindick
March 17, 2009 at 9:15 am
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March 17, 2009 at 10:05 am
All of them to some degree. The point being that the 7 “principles” are based on average measures, which is an inherently Gaussian worldview. It has nothing to do with the models that economists use, and I understand that they are getting better and more sophisticated with their models. I suspect that if their models were truly sophisticated, dynamic and complex from the start — as opposed to closed-form, symbolic and “solvable” — it would be hard to characterize the economistic worldview using such overarching simplifications. Of course this applies to all of social science, not just economics.
Just to make the point more concretely, look at #3. This is neither true nor false in the real world: when there are many competing companies, the market sets the price; when there are few very powerful companies, they set the price.
Or #5. Under the right conditions, the crowd is smarter than the smartest expert. Under other conditions, expertise (i.e. deeper analysis) beats the market regardless of whether everyone as access to the same basic data.
Or #6. Proven many times over that speculators can either stabilize or destabilize.
Complex interdependencies and informational feedback/cascades turn Mediorcristan into Extremistan, and as Taleb argues this is happening more and more as time goes on. Now, I would guess that this reaches trend levels off and the whole thing becomes more stable as the higher levels of organization cohere, but at least for visible history I believe Taleb’s story.
rafefurst
March 17, 2009 at 11:16 am
Good, at least we’re not talking about models then. We’re talking about first principles.
This is one of those areas where you and I disagree. I know what Taleb says and I think you’re misapplying it. So let’s take this one step at a time. Let me ask you some questions to try and explore where our priors differ.
The fundamental tenet of economics is that people respond to incentives. Everything else is derived from that.
So let me start by asking whether you’re saying that the transition to a more extreme world changes this?
kevindick
March 17, 2009 at 11:39 am
BTW, Don Boudreaux just had a reprise of this post at Cafe Hayek:
http://cafehayek.typepad.com/hayek/2005/09/micro_contraste.html
I think this is a good distinction between micro and macro.
From my perspective, I think a shift to a more extreme world has absolutely no effect on the underlying tenets of micro (but does affect the tools used to do analysis).
In contrast, the shift to a more extreme world may leave macro a completely untenable area of study. But as I’ve already noted, I have never been a big fan of macro.
kevindick
March 17, 2009 at 2:36 pm
A more extreme world doesn’t change whether people respond to incentives (they do). But it does change their decision/incentive space assuming they notice that the world had changed.
So I agree that it doesn’t change micro much (depending on how close to the individual you draw the boundary) and it does render macro mostly untenable.
The original question you asked was about the 7 principles, and I note that all of these (except for perhaps #1) are about aggregate behaviors, thus as I read it they are macro claims. Ergo, they become problematic in an extreme world (whether you put a negation sign in front of them or not).
rafefurst
March 17, 2009 at 10:24 pm
Actually, only 2 is definitively a macro question. Micro applies to aggregate behavior in a single (or few) markets (for goods; finance is different).
Remember, these statements are not postulates or even theorems. They’re the typical outcome of analysis when applied to most markets. Yes, it is strictly an error of misplaced concreteness to put these forth as the economic worldview. But he using them as a pedagogical device.
Remember, the micro framework is capable of dealing with lots of other situations (oligopolistic or monopolistic pricing power, destabilizing speculation, etc.). These are just the typical results that most people would find counterintuitive.
kevindick
March 18, 2009 at 8:24 am
I think we’re getting buried in irrelevant definitions. My claim is that in an extreme world, the 7 statements on Sumner’s blog, whether posed in the positive or negative form, become less and less accurate, predictive or otherwise meaningful.
He claims that these statements characterize to a first approximation the difference between economisitic and “common sense” worldviews. Whether you agree or not is besides the point for me; I think they are both wrong 🙂
rafefurst
March 18, 2009 at 11:05 am
I understand you believe they are both wrong. However, my contention is that your belief is mistaken (except for #2) due to your misunderstanding microeconomics. That’s why I wanted to take the discussion up to microeconomic principles (which requires defining the scope of microeconomics).
Given that I have both more of a microeconomics background and more experience working with extreme distributions than you, I thought you might want to explore this more than simply focusing on Sumner’s pedagogical examples (which are not a full first order approximation of microeconomic postulates).
kevindick
March 18, 2009 at 3:39 pm
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