4 ms·

It's really not like economists don't know these things. Kahnemann got his Nobel a long time ago, after all. They also didn't grow tired to mention the flaws in

It's really not like economists don't know these things. Kahnemann got his Nobel a long time ago, after all. They also didn't grow tired to mention the flaws in the model when I learned them as an undergrad 10+ years ago. It's like people insisting physicists are ignoring wind resistance with their laws of motion. They know!

FabHK 9y ago
Absolutely. And of course, Kahneman and Tversky and Thaler didn't get a Nobel price for saying, "oh, hey, listen guys, actually sometimes people don't follow our standard 'homo economicus' rationality assumptions", but to study these deviations carefully (empirically and theoretically) and note when they're important and put them into a coherent framework with some predictive power (aka, a theory). On a side note, the whole libertarian agenda is largely predicated on a caricature of free markets populated by homines economici that was not even advocated by Friedman during the heyday of the Chicago school, let alone today. A professor from the Chicago business school (where Thaler is) came to HK to give a talk (and collect money from alumni), and I asked whether they still subscribed to the Chicago school, given their current research, and she just shook her head and replied "What do you think?"
- eradicatethots 9y ago
  I’m not sure how your second paragraph is relevant, but could you say more?
  - matt4077 9y ago
    The Chicago School is the subset of economics roughly equivalent to what you think about when I say "supply-side, trickle-down, Republicans, poor people need to get off the couch". They were showing how these ideas were misunderstood not just by their opponents, but also by their fans. That part of the political spectrum has added, for example, Ayn Rand's philosophy ("greed is good"), and arrived at a rather nihilistic place where no concept, idea, institution, or emotion that isn't exclusively a "market" is denied to even exist. That's how you get people saying "taxation is theft".
  - FabHK 9y ago
    Sorry if I've been unclear, let me expand: The core notions of libertarianism (humans are free rational agents voluntarily interacting, government's role necessarily involves force and should be absolutely minimal) make sense at least superficially, and follow a nice axiomatic-deductive structure that is seductive particularly to geeks/nerds. Good old neo-classical economic thought basically models humans as such: utility maximising rational individuals interacting voluntarily, frictionless, with complete information etc. You then get nice theorems, such as - the 2 fundamental theorems of welfare economics, which basically show that market equilibrium = pareto-optimal and vice versa, - free trade is best (Hecksher-Ohlin trade theory), - competition keeps businesses in check and erodes their profit to zero, - tariffs and taxes impose dead-weight losses, thus reducing consumer and producer surplus and utility, - managers (as agents) must maximise shareholder value and nothing else, etc. James Kwak has a book and blogposts about this phenomenon, that naive economics seems to support libertarian or right-leaning policy positions. He calls it "Economism" [1] Funnily enough, many of these theoretical arguments rely on hypothetical redistribution of income (e.g. free trade: some people lose, some win, but all in all there will be a surplus, and that can be used (=redistribute) to compensate the losers, so that everyone is better off (or at least not worse), i.e. a pareto improvement. Similarly: maximising shareholder value. Similarly: some tax cuts), and proponents of free-trade-agreements will cite the economic theory with some air of superiority ("everyone will be better off, comparative advantage Ricardo bla bla"), but then conveniently forget about that second part (of compensating losers). So, I think libertarianism doesn't work in the real world and frequently leads to wrong policy decisions. And my main point was this: Advances in economics, among them those from behavioural economists such as Thaler, Tversky, Kahneman, but also others (asymmetric information, e.g. Arrow, Akerlof; minimum wage, e.g. Card & Krueger; etc.) undermine the libertarian fantasy and support the case for politics, with government intervention, regulation, and nudging. [1] https://economism.net https://economism.net
KingMob 9y ago
If we're just waiting for the old guard to die out, I apologize. My econ 101 class was 24 years ago, and we definitely started with rationality as the basis. I'm very happy to hear behavioral economics ideas are now undergrad-level topics. I'll be happier still when they're econ 101 topics, and there's no "behavioral" label at all, because the ideas have taken over the entire field.

FabHK 9y ago

Absolutely. And of course, Kahneman and Tversky and Thaler didn't get a Nobel price for saying, "oh, hey, listen guys, actually sometimes people don't follow our standard 'homo economicus' rationality assumptions", but to study these deviations carefully (empirically and theoretically) and note when they're important and put them into a coherent framework with some predictive power (aka, a theory). On a side note, the whole libertarian agenda is largely predicated on a caricature of free markets populated by homines economici that was not even advocated by Friedman during the heyday of the Chicago school, let alone today. A professor from the Chicago business school (where Thaler is) came to HK to give a talk (and collect money from alumni), and I asked whether they still subscribed to the Chicago school, given their current research, and she just shook her head and replied "What do you think?"

eradicatethots 9y ago
I’m not sure how your second paragraph is relevant, but could you say more?
- matt4077 9y ago
  The Chicago School is the subset of economics roughly equivalent to what you think about when I say "supply-side, trickle-down, Republicans, poor people need to get off the couch". They were showing how these ideas were misunderstood not just by their opponents, but also by their fans. That part of the political spectrum has added, for example, Ayn Rand's philosophy ("greed is good"), and arrived at a rather nihilistic place where no concept, idea, institution, or emotion that isn't exclusively a "market" is denied to even exist. That's how you get people saying "taxation is theft".
- FabHK 9y ago
  Sorry if I've been unclear, let me expand: The core notions of libertarianism (humans are free rational agents voluntarily interacting, government's role necessarily involves force and should be absolutely minimal) make sense at least superficially, and follow a nice axiomatic-deductive structure that is seductive particularly to geeks/nerds. Good old neo-classical economic thought basically models humans as such: utility maximising rational individuals interacting voluntarily, frictionless, with complete information etc. You then get nice theorems, such as - the 2 fundamental theorems of welfare economics, which basically show that market equilibrium = pareto-optimal and vice versa, - free trade is best (Hecksher-Ohlin trade theory), - competition keeps businesses in check and erodes their profit to zero, - tariffs and taxes impose dead-weight losses, thus reducing consumer and producer surplus and utility, - managers (as agents) must maximise shareholder value and nothing else, etc. James Kwak has a book and blogposts about this phenomenon, that naive economics seems to support libertarian or right-leaning policy positions. He calls it "Economism" [1] Funnily enough, many of these theoretical arguments rely on hypothetical redistribution of income (e.g. free trade: some people lose, some win, but all in all there will be a surplus, and that can be used (=redistribute) to compensate the losers, so that everyone is better off (or at least not worse), i.e. a pareto improvement. Similarly: maximising shareholder value. Similarly: some tax cuts), and proponents of free-trade-agreements will cite the economic theory with some air of superiority ("everyone will be better off, comparative advantage Ricardo bla bla"), but then conveniently forget about that second part (of compensating losers). So, I think libertarianism doesn't work in the real world and frequently leads to wrong policy decisions. And my main point was this: Advances in economics, among them those from behavioural economists such as Thaler, Tversky, Kahneman, but also others (asymmetric information, e.g. Arrow, Akerlof; minimum wage, e.g. Card & Krueger; etc.) undermine the libertarian fantasy and support the case for politics, with government intervention, regulation, and nudging. [1] https://economism.net https://economism.net

KingMob 9y ago

If we're just waiting for the old guard to die out, I apologize. My econ 101 class was 24 years ago, and we definitely started with rationality as the basis. I'm very happy to hear behavioral economics ideas are now undergrad-level topics. I'll be happier still when they're econ 101 topics, and there's no "behavioral" label at all, because the ideas have taken over the entire field.