Look at the World. Not Your Models.

EconTalk Extra
by Amy Willis
Arnold Kling on Economics for ... Beth Redbird on Licensing...

rethink.jpg Are economists outdated? Has our economy changed more than professional economists can keep up with? If all the practitioners of economics were to develop amnesia, which concepts would still remain when they woke up? In this week's episode, host Russ Roberts welcomes back Econlib's own Arnold Kling, who has a unique critique of the state of economics today.

What do you think the most enduring economics concepts are? How ought economists approach their subject anew? As always, we want to know how you would like to continue the conversation.

1. Kling makes the case for price discrimination as one of the most timeless concepts in economics. What's his argument for its importance, and to what extent do you agree? What concept(s) would you suggest as enduring across the ages, and why?

2. Why does Kling believe economists couldn't see the 2008 financial crisis coming? How convincing do you find his case? To what extent should financial intermediation be a central part of economic education?

3. How might the sorts of intangibles Kling is worried about be accounted for in measures of economic performance?

4. Why is Roberts so concerned about what he calls tribalism? How does it affect the economy, positively and/or negatively?

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COMMENTS (3 to date)
Sean Menzies writes:

Coming into economics from psychology, the part of the discussion that resonated with me was the discussion on intangibles.

I found Russ' suggestion that 'if we can't measure it, we should bother with it' to be fairly illustrative of the limitations economics imposes on itself, although I wasn't satisfied with Arnold's rebuttal.

In my mind, if you want to understand a concept in sufficient detail, you have to do your level best to understand all the variables, not just those you can satisfactorily measure (not that economics has a problem reducing the likes of utility and demand to a precise value).

In my mind, the resistance comes from the fact that economics still seems to consider itself a branch of mathematics rather than a social science. The very fact that economics is the study of human interaction should have been enough to long since disabuse economists of that notion, but it appears that models making wild and, frankly, inaccurate assumptions and/or explaining incongruence through mythical externalities, are still the goal of many.

To me, as long as this rejection of the need to philosophise in the absence of inclusive models persists, economics will fail to understand the economy.

Luke J writes:

1) First concept that comes to my mind when I hear the name Scott Sumner is "Never Reason From a Price Change." With Arnold Kling? "Price Discrimination Explains Everything." Price discrimination is a tool useful in maximizing gains from trade, and, despite rules designed to control it, will endure as long as human beings exchange goods and services.

2) Some did and had their moments in the sun. I wonder if Kling or anyone else has revisited the 2002 - 2007 period to see why economists generally were unconvinced by claims of brewing trouble. I certainly never learned anything about credit default swaps in my econ classes years ago. Maybe Kling is right, the tools and models are just not current.

3) AWS, despite being "in the cloud," still functions with tangible inputs, tangible outputs, tangible gross and net profits. Rather than speaking in tangible and intangible, we are really taking about quality vs quantity. Measurements of GDP and Unemployment, which are quantitative measures (and arguably do not capture quantity very well), cannot narrate the story of qualitative progression & regression. When Kling talks about the need for better/newer tools, Economists probably need something better for qualitative measurements, and should revisit the products in that basket of goods for quantity as well.

4) Probably because Russ has read Hayek, and Hayek closely related tribalism to that part of human action which is instinctual and based on survival, rather than human action based on rules of the extended order which led to exponential gains in human prosperity.

Maureen writes:

Interestingly, in some fields, there is no choice but to look at the intangibles. This is true of many fields, especially safety and security (my field is chemical process safety). If you can't try to figure out and measure when people do the right thing (hurting themselves and others), instead of the wrong thing, you won't get anywhere. There is a lot of of human behavior that remains elusive to measurement, but we know more than we did and it helps. We now know that we also have to look at organisations and why they make the wrong decisions. Intangible, yes, but also, necessary if we want to save lives and reduce negative externalities of economic activity.

Also, emerging accident theories suggest that you can solve mysteries of "unsafe" human behavior by assuming that the human is a rational decisionmaker. Then you backtrack and ask why he/she made the wrong decision, if they were indeed rational. A lot of accident cases have had excellent learnings using this technique, instead of just blaming the lead actors (who are the lead victims), and there you learn nothing except reinforcing a belief that humans make mistakes and that's all there is to it.

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