More Human Economics

I wrote previously on the potential relevance of behavioural economics to policy. The programme for the AEA conference this year reveals the extent to which academic economics is attempting to augment traditional models with insights from psychology. Recent popular books such as Nudge by Thaler and Sunstein, Animal Spirits by Shiller and Akerlof and Basic Instincts by the ESRI’s Peter Lunn have served to bring these ideas into the public sphere. Another upcoming book by Akerlof and Kranton attempts to bring the literature they have developed on Economics and Identity more squarely into economic debate (see George Akerlof’s IDEAS page for many of the papers the book is based on). The drive to make economics a more human discipline is discussed briefly here as a positive development by Angus Deaton. Deaton primarily addresses the issue of cognitive biases and there is a growing consensus that information processing limitations should be worked into economic models. However, the challenges posed by integrating constructs from areas such as neuroscience and identity theory are theoretically more fundamental and practically more difficult as they involve languages that most economists simply have never used or considered relevant to their domain. My point in posting this brief post is to encourage people interested in how economics relates to policy to begin to consider these academic influences and what they may imply in Ireland. The economic response to the current recession in Ireland relies in no way at all on any of these new literatures and our approach to training economists and finance professionals has largely remained unaltered by them. A good debate about how seriously we should take these literatures for policy is timely.

29 replies on “More Human Economics”

Hello Liam,

What would be a good primer for someone looking to get into this field? Any ‘must-read’ papers?

Daithi, any popular books are going to some extent gloss over a lot of things that are being debated in the academic papers. However, the books listed in my post would not be a bad way to spend a wet Sunday afternoon and they all have good reading lists.

By Post Author

@ Liam D,

“However, the challenges posed by integrating constructs from areas such as neuroscience and identity theory are theoretically more fundamental and practically more difficult as they involve languages that most economists simply have never used or considered relevant to their domain.”

Amartya Sen’s most well known book, Development as Freedom contains a lot discussion and re-interpretation of modern economic/political thought – especially as it applies to debates common within the United Nations.

Another one of Sen’s books, in one I have meant to read often.

IDENTITY AND VIOLENCE
The Illusion of Destiny.
By Amartya Sen.
215 pp. W. W. Norton & Company.

Perhaps Sen’s book about identity might help bridge the gap between concepts as such and the way economists think.

The Psychology of Judgement and Decision Making by Scott Plous is a good primer too, as well as those metioned.
The academic literature in this field is fairly accessible.

@ Liam D,

actually, I was reading back through some ancient mid-2009 rants of my own tonight. I can’t explain exactly why that would be a good idea. By coincidence, it did occur to me there is a very strong opposition at work between ‘construction economics and management’ and the alternative, softer, dare-I-say more female approach to building.

This is typified in the most recent change in approach used at Ballymun. Moving away from the old Ballymun, which was an experiment in prefabrication and economies of scale in construction – and the more recent approach, whereby a lot of social science is brought to the table.

I must confess, that a learned commentator from the United States, feels that Ballymun doesn’t go nearly far enough towards the social sciences end. A learned commentator I might add, who has been involved in building projects and managing them in some of Boston city’s most challenging urban environments. For what it is worth, you are welcome to read through my rant at this link.

http://designcomment.blogspot.com/2010/01/ireland-and-construction-part-one.html

All I mean to do, is draw attention to the fact that construction has become ‘invaded’ by social science in recent decades. The movement that Deaton referred to in his article is not only happening in pure economics – but some of the less pure cousins also, namely construction economics.

Thanks for this post on a very important subject. I strongly recommend Animal Spirits – an excellent summary of a wide variety of research within a narrative construct that makes a specific attempt to explain the current crisis.

I would also draw attention to Steve Keen’s work, both his book Debunking Economics and his blog http://www.debtdeflation.com Keen was one of 12 economists originally recognized by Dirk Bezemer’s paper as having predicted the current crisis* and he continues to be a useful analyst to follow as things develop. On the blog he has a nice section of lectures on Behavioural Finance that is worth exploring: http://www.debtdeflation.com/blogs/lectures/

*http://www.ft.com/cms/s/0/ec470a00-9c0e-11de-b214-00144feabdc0.html

As there is money to be made by deferring regulation etc I would welcome awareness of the role of lying and deception in economic thought. Those who deliberately distort economic theory and facts ie history in an attempt to rape the OPM box and feather their own nest!

Start with Nathan Rothschild at Waterloo! John Law before that.

@Pat Donnelly
I think one of the major lessons of human economics is that the ruthless and goal driven win. Their opponents should start adopting the same attitude.

http://www.politics.ie/fianna-fail/121187-fianna-fail-pull-stroke-again-sideline-other-parties.html

The very least result of our economic Chernobyl should be that the opposition do not hesitate to call, and do everything possible to achieve, the resignation of ministers and the government.

The Entropy Law and the Economic Process: Nicholas Georgescu-Roegen. A neglected voice.

The Theory of the Leisure Class: Thorstein Veblen. Biting commentary on excess production and accumulations.

Try Karl Rogers, Chris Argyris and Donal Schon for some useful aspects of behavioural psychology in non-clinical settings. Academic stuff.

If all else fails: Theory of Moral Sentiments: Adam Smith.

This list, as with any similar, presupposes one has vast amounts of ‘non-working’ time available! If only!!

B Peter

Liam,
Applying loosely your post to public good theory can throw up some interesting ideas, where public goods are aspirational and broadened in scope to include things such as health and education (things that help people move up Maslow’s hierarchy.

Can identity have anything to do with an individuals levels of consumption of public goods (in this context public goods can be widened to include access to health, education etc. and they may be viewed as public goods as aspirational, i.e. more and better access to, and consumption of, such goods)?

May identity also have Maslow’s hierarchy as a proxy measure?
what you have access to moving up Maslow’s hierarchy may determine identity in the sense of measurable (access to health, education etc.)

For useful purposes (measurement, policy formulation, incentive structuring etc.) can micro policy be equated to personal well-being, which may be measured as access to, and consumption of, public goods?

Can this optimally aspirational micro policy (personal wellbeing strategies) by extrapolated to the macro level, initially at the local level and then up to national?

What are the implications of even beginning to think along these lines and would it be useful?

@ Liam

Good luck. Poor old utility-maximising homo economicus has been flogged to death. You have highlighted no shortage of supply of alternative, richer, deeper and more fruitful approaches, but what of the demand? Brendan Keenan, in last Thurs.’ Indo, was quite eloquent:

“A successful small open economy requires an open society. The danger for Ireland has always been that a patina of modern activities, mainly foreign but increasingly native, would be laid on top of a society which itself had not modernised sufficiently to nurture such enterprise.

The paradox is that the most rapid modernisation of Irish society took place in the 1960s and 1970s, when the economy had just been opened. It seems to me that it has slackened ever since, and regressed in the 2000s.

Despite outward appearances, a case could be made that the Ireland of 2009 is more like that of 1959 than 1969.

If this is the case, new economic policies, even from new ministers, will not be enough.

Something close to a revolution in our attitudes towards secrecy, accountability and the protection of vested interests is required if the rot beneath is not to fatally corrode the already tarnished outside patina.”

@NAMA…., I’ll leave this one up but it looks like you are just planking up comments you originally posted on politics threads on another blog on lots of posts here, whether related to the post or not.

By Post Author

@BP Woods.

Veblen and The Theory of Moral Sentiments are certainly interesting historical roots for a lot of this work. See e.g. the paper below but a lot of others exploring this. The entropy stuff is your unique contribution to the debate. I would take a lot of convincing that Nicholas Georgescu-Roegen has anything to do with modern behavioural economics other than in a very loose way.

http://hbswk.hbs.edu/item/5168.html

@Brian Hanlon – good reference to Sen, I should have referenced him in the post itself. The widening out of urban economics is also interesting – I’d drop the “more female” stuff though. The idea that some types of economics are more macho than others probably does exist in the minds of some people but it doesnt survive any decent scrutiny.

@Garret Wise: there are many different efforts to incorporate some notion of well-being other than utility from consumption into these literatures. Daniel Kahneman is one of the leaders in attempting to incorporate measures of well-being that derive from experience. Robert Fogel’s work examines the changing priorities of societies at different stages of development. And Sen, of course, has a well developed theory of human capabilities.

@Paul Hunt

One thing that is running through a lot of the comments on these posts is a huge demand for more discussion of corruption and accountability. To the extent that it overlaps with what I was trying to raise, there is increasing emphasis of understanding why people act corruptly (animal spirits is great on this). Basically, a lot of this literature is moving from a view that people will be corrupt if they can get away with to a position where corruption results from a more complex array of financial and social incentives. I might try to flesh this out on another thread.

By Post Author

@BP Woods

In retrospect, Nicholas Georgescu-Roegen could probably be linked anywhere so I don’t mean to be dismissive if you have drawn your own lines back to him. But let’s agree he is not a primer for people looking for a handy introduction to modern behavioural economics.

By Post Author

What does behavioural economics tell us about the policy response that we don’t know from the standard models? As a leading Irish practitioner, the author should tell us this before we judge the effect of its omission.

@Liam,

Many thanks. I’m not trying to drag this thread off into consideration of banking, corruption, inquiries, etc. As a descriptive technique I use a focus on the accumulation of power, profits and prestige as significant motivating factors. It probably doesn’t get one very far as an analytic technique, but it does help to explain some of the factors that contributed to the current financial and economic mess – and to which mainstream economics paid relatively little attention. I happen to think that the vast majority of market participants did not behave corruptly – they behaved perfectly rationally in the context of their objectives and the constraints (or lack of them) and incentives they encountered. “Freshwater” economists, with their espousal of efficient markets, minimal regulation and negligible policy intervention, acted as very useful idiots for those who wished to exercise market power, capture unearned profits and secure the approval of their peers.

Ireland adds an another twist to this story. In most developed economies financial and more general economic regulation was taken seriously previously; the Greenspan era simply facilitated its dismantling. Irish policy-makers felt the need to develop some form of regulatory arrangements – every other modern economy had them. But there was no intention to empower them to operate as they previously had in other countries. It was merely a facade – or a patina as per Brendan Keenan.

Getting this right presents a major challenge and the economics literature you are advancing is very relevant in this context.

@LD: Yep! I hold that some of the historical insights – from a variety of sources – may be helpful in building a more meaningful? understanding of what are, complex and often confounding, situations. The pace of contemporary thought – and publications in some fields is a virtual blizzard! I suppose that I more attracted toward that which I are more familiar with – and which I have had time to read and understand.

Any author/s you would recommend before others?

Nice to know that NG-R is not dis-remembered!

B Peter

@Liam Delaney

Excellent post – if we had more of this approach in Irish policy formation, and were more of it taught in our 3rd level institutions – we might now be quietly sipping iced tea with a dash of Bailey’s as distinct from looking to a decade of forcing ‘bitter lemons’ (apologies to Akerlof!) down our throats. Acknowledging the usefullness, if partial, of neo-classical approach, it needs to be complemented by more of this – mainstream micro-economics imho is incapable of explaning ‘how’ and ‘why’ the present mess emerged or who and what were the main actors, forces, and institutions involved – for the upcoming ‘inquiry’!

Would like to get more involved in this thread, but ‘gotta make a livin’ to pay me taxes and contribute to feeding the zombies. Keep up the good work ………. jhc, that bitter lemon tastes awful!

@Liam Delaney
Sen’s capabilities would be closest to what I have in mind, but access to such public goods as I have mentioned may also be considered as substantive freedoms (access to health, education, financial services, labour etc. as freedoms).
And I would posit that there is a sequence, without shelter, energy and water you have nothing, with these you worry and naturally aspire to (?), health, and then on to education and then labour (putting health and education together and actually doing something) and so on.
This sequence may use Maslow’s hierarchy as a somewhat crude but effective modelling parallel to illustrate how.
How about ‘capable access’ to public goods, in a personal and human priority hierarchy, incorporating Maslow, public goods, Sen and behavioural economics to illustrate a ratchet effect of human behaviour and welfare desires ?

Edward

In terms of the policy-response, my point in the post was to start a discussion rather than finish but since you ask the question, I will give an answer.

One view is, of course, that incorporating more complex behavioural models into policy adds very little. For example, if we rewind the clock a little, had Ireland ensured that banks obeyed some very well accepted rules about property lending and had the government applied some basic rules of fiscal policy as well as Philip’s suggestion for a rainy-day fund then perhaps the economy would be a lot more stable than presently. In this state of the world, adding psychological assumptions is a distraction.

There are a number of reasons why I don’t believe that, including the following:

1. Without a working theory of human development, it is extremely difficult to think about prioritising current expenditure such as education and health spending. In the economic debate up to now, we tend to think of current spending as just a component of aggregate demand. Basic microeconomic principles are sometimes used in evaluation settings but quite sparsely and certainly no attempt has been made to integrate behavioural evidence. The upshot is that there is a disconnect between financing allocation and any sort of model of how people gain benefits from services.

2. A keener awareness of how people making saving and investment decisions would certainly have helped in terms of moving the savings rate to a more sustainable position in the late 1990s.

3. Similarly to that, very little attempt was made to work soft mandatory elements into pension provision, despite the wide variety of models available. In general, our pension system is now a mess with very poorly framed incentives and little attempt to help people overcome strong psychological tendencies to postpone these decisions.

4. The complexity disincentives from taxation are poorly understood and we still simulate tax effects using bizarre assumptions about how people process information. Our tax system is now far too complicated in all dimensions and we don’t have a mechanism for working on this.

5. The main justification for increasing spend on unemployment measures is purely psychological. Traditional economic models simply can’t capture the psychological consequences of unemployment.

If some of these seem a little micro, that’s really because the literature operates at a micro-level and is driven increasingly by policy experiments. In general, I believe that this literature is pointing toward a more efficient way of taxing and regulating the economy and a proper model of service provision.

But also remember that these are literatures that have not been applied in Ireland much before. There is a lot of debate needed and I dont want to be an unconditional advocate as this is not a sensible position to take on any literature.

A few people have been asking me what to read. Daniel Kahneman was awarded the Nobel Prize for this work and therefore I would certainly read him. He cites Richard Thaler in his speech as the person who really brought this work into Economics and therefore I would read him. Thaler and Shiller have probably done more than anyone to take these literatures to mainstream economics and therefore anything by them. The Nudge and Animal Spirits books again are good because they are gentle introductions with good reading lists. A slightly out of date list I put together to answer this for someone before is here http://bit.ly/2iYR0T

@ Liam D,

I think the use of ‘female’ on my part was probably a mis-quote alright. But I know that some of the people who look at urban economics do use vocabulary like ‘soft’, in order to contrast with the traditional disciplines associated with urban economics and planning, which are deemed to be the ‘hard’ disciplines such as road engineering, utilities, flood planning etc.

In the kind of analysis I describe, the bones and skeleton are provided by the hard disciplines, and the blood and sinews provided by the soft-er disciplines, who are encouraged to ‘sit around the table’ for discussion more and more these days. I believe it was Charles Landry who spoke about this in an RTE Radio interview.

http://www.charleslandry.com/

@ BP Woods,

“Try Karl Rogers, Chris Argyris and Donal Schon for some useful aspects of behavioural psychology in non-clinical settings. Academic stuff.”

If you are into that sort of psychological research, also check out Frederick P. Brooks.

Donald Schon was a major influence on Brooks and his thinking in recent years. My understanding is that Brooks is publishing a new book of essays very shortly. I might get a mention in the references. I made a very small contribution on the pheriphery to do with large construction projects.

BTW, Daniel Kahneman and Amos Tversky’s work formed a fairly integral part of Clayton Christensen’s development of his Innovator’s Dilemma model, in that second book of his, The Innovator’s Solution.

Something to do with encumbant organisations, like say an old established newspaper being threatened by new media. The idea being, according to Christensen’s development on Kahneman/Tversky’s work, for the old organisation to invest in new media – but in order to get resources for this new media off-shoot – you initially frame ‘new media’ as a threat to their business. Then having got the funding secured, you change your philosophy and begin to frame the new media as a opportunity, rather than as somethign negative, as being a threat.

The point being, unless the old organisation perceives initially that something is causing danger to its very existence, it likely will not allocate sufficient resources, and therefore not act at all.

Hence the title of the second book by Christensen, The Innovator’s Solution.

It’s a pity economics, which is more of a pseudoscience than economic sociology, holds so much sway in policy circles. A discipline that runs on status and assumptions. Behavioural modelling is another course of action fundamentally flawed. Behavioural models need to be situated in models of external influences and that’s no easy feat. External influences also need to be understood through the filtering processes of social relations. True sociology is not about parsimony but the world is, as the current crisis highlights, a lot more complex than what economists are able to understand- economists being the conjurers of free market economics and neoliberalist philosophy all supported by narrow presumptions about self interest (self and interest mean many things – self can be inclusive of family, politics, nationalism, identity and interest operates in accordance)

Comments are closed.