Wednesday, June 07, 2006

What is New and Essential in Economics?

The marginal revolution has posed a good question; What is new and essential in economics? Our challenge is well stated by the nobel laureate George J. Stigler, in The Conference Handbook, 85 J. POL. ECONOMY 441, 442 (1977). "Adam Smith said that." Stigler was arming young economists with good comments at an academic seminar. But does Stigler's quip apply to all of the thoughts by leading academic economists in 2006?

My own answer to Tyler's question is social interactions. Empirical and theory work on non-market effects of jealousy, keeping up with the joneses, altruism, environmentalism, religion and different groups living "side by side". These real world issues cannot be handled in an arrow/debreu economy. Such issues help meld economics, psychology, political science and sociology into a true empirical social science. I think this is pretty exciting stuff. But, enough about me -- let's see what some serious guys think.

One way to think about what is new in economics is to look to Chicago and Gary Becker in particular. Here is a recent website related to a recent conference in his honor.
Ed Glaeser and George Akerlof are quoted below.

The biggest questions facing economists today are about more than money; they involve things like terrorism, democracy, religion, and race. Economists discussing the “Biggest Questions of the Day” at the Hyde Park Center April 8 said these problems require them to consider social issues in addition to economic principles—and that Nobel laureate Gary Becker showed them how.

“The reason we feel free to study these [social issues]—the fact that these things are part of our jobs—is Gary’s greatest legacy,” said Edward Glaeser, professor of economics at Harvard. “The agenda for the biggest questions is using Beckerian tools to understand them. It is not optional—you have to address these topics, and the only way to address them properly is using the tools of Chicago economics.” Glaeser was among panelists at the inaugural conference of the Becker Center on Chicago Price Theory Founded by Richard O. Ryan. The event honored Gary Becker, University Professor of Economics and of Sociology.

Glaeser presented a list of big questions that included terrorism and anti-Americanism, and religious and ethnic conflict in sub-Saharan Africa. These questions are connected by a thread of false belief, Glaeser said. For example, there is little correlation between what America actually is and does and what people believe it to be. But there are “entrepreneurs of error” who have an interest in perpetuating falsehoods, and in a large percentage of cases people believe what they’re told without thinking about it, he said.

“Parents, teachers, politicians, the media, religious leaders are all in the belief-formation business—all are occasionally the suppliers of truth or the suppliers of error,” Glaeser said. “It’s the nexus between psychology and economics. Psychology documents how people are persuaded, but it doesn’t take into account how frames, influences, and situations are the result of market forces. They can be only understood with a market analysis, and only economics has the tools to make sense of them.”

Becker, who chose not to present his own list of big questions but rather to comment on those presented by the other panelists, agreed. “Economists must find a new model to address persuasion and what gets done in the government. We first have to understand it; then we can hope to improve it,” he said. “A big issue now is understanding persuasion.”

In terms of terrorism, Becker said, one question is, what can government policy do to reduce the threat? “Another is, what can we learn through economic analysis about who becomes a terrorist? It’s not just poverty. It’s not just a clash of civilizations,” he said. “We don’t have a good understanding, but economists can make progress on this.”

Another issue for economists, Becker said, is one that has not only interested him since the early days of his career, but which remains one of the biggest questions of the day, according to George Akerlof, 2001 Nobel Laureate in Economic Sciences and Koshland Professor of Economics at the University of California, Berkeley.

“The continued disparity between whites and blacks is a leading problem that is special to the United States,” Akerlof said, “We see this in the discrepancy between incarceration rates of whites and blacks, and in the differences in numbers of single-parent families.

Added Becker, “The black/white issue is the American dilemma. It’s gotten better in significant ways—economically, educationally, politically. But while blacks have participated in growth, they haven’t caught up. It’s a puzzle to understand why not, and still a major world issue challenging economists.”

Another major question on Akerlof’s list was global warming. He said the “evidence now is quite abundant that this is a serious problem,” and pointed to measurable effects, such as the increased power of hurricanes and what he calls “the galloping glaciers of Greenland,” which are heading toward the ocean at a faster rate than was previously thought impossible.

“The economics of this are that it should be curbed by taxation and those kinds of externalities,” Akerlof said. But it’s more complicated than that. “The solutions to global warming will require cooperation among many different governments, and they aren’t going to want to change tax structures to create the right incentives to diminish carbon emissions into the atmosphere. Dealing with the economics of that is a first order question.”

The world poverty of underdeveloped countries is another big question, according to Akerlof. “Massive poverty is the result of the failure of governments and markets,” he said. “It’s a failure to adhere to and support a rule of law. Some say a failure of markets, but why do markets systematically fail?”

Becker suggested they fail because governments impose obstacles that prevent the basic abilities and talents of a population to be manifest. “Markets don’t work perfectly,” he said, “but it’s hard to look at poverty in the world and conclude anything other than, Most obstacles aren’t the difficulties of having markets function, but the obstacles put in place by misguided government policy. I say misguided in quotes—usually there’s a reason you have these policies, and it’s because certain individuals are benefiting and it’s hard to get special interest to change.”

But, Becker said, when governments remove these obstacles, as in the cases of India and China, “it makes a big difference.”

Akerlof’s last big question of the day had to do with the possibility of worldwide macro-economic collapse. “It’s not about to happen right now,” he said, “but if deficits continue within the definite future, we’ll go into what we thought was a minor crisis, which can evolve into something major. I’m worried about that.”

To conclude the discussion, moderator Austan Goolsbee, Robert P. Gwinn Professor of Economics, likened Chicago economics to Disneyland. “If Chicago is the Disneyland of economics,” he said, “Gary Becker is Walt Disney.”

—Carmen Marti