Transcribe your podcast

This episode of rationally speaking is brought to you by Stripe Stripe builds economic infrastructure for the Internet. Their tools help online businesses with everything from incorporation and getting started to handling marketplace payments to preventing fraud. Stripe's Culture puts a special emphasis on rigorous thinking and intellectual curiosity. So if you enjoy podcasts like this one and you're interested in what Stripe does, I'd recommend you check them out. They're always hiring. Learn more at Stripe Dotcom. Welcome to, rationally speaking, the podcast, where we explore the borderlands between reason and nonsense.


I'm your host, Julia Gillard, and I'm here with today's guest, Professor Chris. Old Chris is an applied econometricians at the University of Victoria. He works on issues related to health, the labor market, education, and he blogs at Chris Blackcomb.


One of the topics that Chris covers on his blog is basically critiques of critiques of economics and one of his most widely shared posts. In fact, I think the reason that I encountered his blog in the first place is titled 18 Signs. You're reading Bad Criticism of Economics. So that's the one of the main topics we're going to talk about today. Chris, welcome to rationally speaking. Hi. Good to be here, Chris. This might be a tough call for you to make, but if you had to pick one or two of the mistakes that people make when critiquing economics from your list that you think are the most common, most common, you know, bad critiques of economics, what would they be?


I think the major mistake people make is simply misunderstanding what economists actually do, and that's like picking all of them to be true. So my major complaint is most people, straw man economics, they say economists do X and economists or do or think X and economists don't do or think X at all. So there's this kind of a non-starter. My main criteria for a good criticism is simply that people correctly state what economists think and then make some criticism, good or bad.


Well, at least we can talk about whether the criticism is correct. If it's just a straw man, if it's saying something that economists don't actually think, then it's a complete non-starter. So the major one is probably most people think and survey evidence shows this, that what economists mostly do is make macroeconomic forecasts. And that is really, really wrong. Probably less than one percent of academic economists do anything related to macroeconomic forecasting. So it's kind of frustrating to see the same criticism over and over and over and over again.


When I when I studied economics, the two things that I got from people were a, you know, MacCracken. Oh, so you can forecast the economy and both. You can tell me where I should invest my money.


Oh, yeah, that's another one. I don't know anything about the stock market, so don't ask me anything about that.


OK, well, what about the most common mistake or misconception among, let's say, people who should know better, like, like smart, well-informed people who are, you know, arguably probably arguing in good faith. They're not like trying to do a hit job or smear job. What's like a common misconception among that crowd?


Well, the other the other major misconception is a faulty orientation in the sense that people are really talking about politics and not economics. The word economics sort of has both meanings. We could talk about, say, Ronald Reagan's economics. And we don't mean when we say that Ronald Reagan's methodology of studying the social world and collecting information and reasoning about it, we mean the particular set of policies that Reagan advocated advocated. Sorry. I think a lot of people, when they talk about mainstream economics, what they really have in mind is a particular set of policies that they like or don't like.


And that's not what I or most other academics would think of. When we think of economics. We're thinking about climate science, the methods and data and results, not a political orientation. I think the major thing that people would be surprised about if they actually spent time in an economics department is how shockingly apolitical it is. There's really not much political talk going on at all. It's not political philosophy.


Is it implicitly political? Like, I don't know their their value assumptions.


I mean, economists, like anybody everybody else have political discussions and think about politics. If you went to a chemistry department, you would also find people talking about politics. But in terms of the day to day work, economic research, it's really not very political at all.


So one common misunderstanding that I run to, the stuff that I think about and write about and talk to people about is sort of related to economics that involves, you know, modelling like descriptively how do people make decisions and normatively, how should they make decisions and things like that. So there's some overlap there and and some things, items on your list that really resonated with my experience talking to people about decision making were misconceptions or miscommunications about specific words that come up a lot like rational or efficient or I don't remember what the others were utility or or else a big one.


Yeah, externality was the one the one on your list. And so I want to I want to talk about the rational one a little bit later in the episode, but. I'm curious if you could elaborate more on, like, how many people misunderstand other words, like efficient or externality? Sure. And this is a big problem. And as you said, there's people who aren't trying to do a hit job who simply misunderstand, in part because a lot of economic jargon is really terrible.


So you so rational is a big one. We can talk about that later. Externality is another big one. You hear people say, oh, economists just they don't care about the environment. They treat it as an externality. And I can see why they think that. If you see if you just hear the word externality, it sort of seems like, oh, we're saying it's external. It doesn't matter in some sense. It actually means a cost or benefit imposed on a third party that isn't compensated.


And it's fundamental to a lot of economic thought. And it specifically doesn't mean something we're ignoring. It's a big problem that we have to address. So the major example is always the environment. If we do stuff to destroy the atmosphere or otherwise wreck the environment, that's called an externality. But it's the actual conclusion is this is the polar opposite of we should ignore it. It's we really have to worry about it.


I'm sorry to interrupt. I want to hear the rest of your thought. But just before I move on the. I wonder if what's happening in specifically in the case of the you know, you don't care about the environment critique, is that it's not that people are misunderstanding the word externality, but that's kind of like an epiphenomenon. What's really happening is they perceive that economists don't if people don't value the environment in the sense of being willing to, like, put their money where their mouth is to preserve the environment, then economists consider that to be almost by definition, the environment is like not valuable.


And these critics, the public, see that in there, like, you know, that's the wrong way to assign value to things. And then they use the word externality wrongly when they're trying to explain their critique. But that's not really the misunderstanding.


I think there is a germ of a valid criticism there. Economists are always going to get back to how this affects human welfare. So if you're if you have a philosophy that says that the environment should be valued for reasons above and beyond how humans value the environment, including all future generations and all sorts of considerations like that, then that's hard to square with mainstream economic thought. But I'm just saying, people aren't willing to put their money where their mouth is is a little bit problematic because there's a free rider problem.


Right. We might all agree that we should all contribute to a carbon tax, even though I personally would prefer not to have to pay the carbon tax kind of issue.


Right. But you think that economists do when their reasoning and writing about the environment, they do take into account the fact that future generations preferences aren't being counted in the current, you know, allocation of of money.


Sure. Yeah. That's a big issue in environmental economics. It's a it's a really problematic issue because it's really difficult to know how to deal with future generations if we just usually in most economic models, we would just geometrically discount and so just apply in interest rates and and push it out arbitrarily far into the future. And that essentially means once we're far enough into the future, we're essentially putting zero weight on those far enough away generations. And you can come to all sorts of absurd conclusions if you do that.


On the other hand, you come to absurd conclusions if you don't do that.


So it's it's a difficult problem, but it's certainly when lots of economists are thinking about, yeah, OK, so popping back up one level, I think you were going to talk about efficiency or a different word. Oh, efficient.


Yeah. That's also when economists talk about efficient way they almost always have in mind is something that really means something like let's not just leave money lying on the floor or value. Right. Yeah. Money is just anything that's about yeah. We shouldn't be wasteful. If there's a mutual gain to be had, we should, we should exhaust that mutual gain, whereas a lot of people hear the word efficient and they think it's much more technocratic concept. Or maybe it just means profit maximizing, which isn't what it means at all.


I was just going to say, to be fair, the fact that economists use the word money is shorthand for anything that we care about might contribute to the misunderstanding that it's all about profit maximizing.


That's fair enough. Yeah. Yeah. A good example of the efficiency arguments or the how efficiency isn't the same as profits is every economics student learns in the first few weeks of economics, one to one. The monopolies are not efficient, but maximize their profits. So the word doesn't mean what most people think it means. Perhaps.


OK, we've started to touch on this a little so far. But one of the big questions I wanted to ask you is about your your model of the reasons these misconceptions exist and persist. So they're like I'm just curious about roughly how you would apportion the quote unquote, blame between, say, economists themselves being bad at communicating or explaining themselves versus, you know, the popularizers of economic theory, like pundits or journalists versus the third category might be something like, I don't know, prejudice or willful misunderstanding.


Like, for example, you could imagine if people see economists as like the champions of the reigning power or class or something, then they might just be motivated to misinterpret whatever economists say through this lens of like, oh, they're just trying to, like, keep the rich rich or something like that. So it's not like not necessarily conscious prejudice, but that's sort of why they keep misunderstanding this.


Oh, well, there is that explicit argument. Economists are just in the pocket of big money and they're just defending the current power structure.


Yeah, but then they're like understandings of stuff could be unconsciously filtered through that lens. That's just like one example of a of a reason. But how would you like a portion of the blame for the misunderstanding? The economists?


We are in part to blame. I think economists do a worse job popularising how we go about approaching our science than many other disciplines do. My little contribution there is my little blog post and things like that. I think, yeah, I would hope the more economists would kind of push back against really particularly the strawman arguing. It's against economics, on the other hand, there are people who I think are have bad motives in the sense that, well, ironically, neoclassical economics would predict the existence of people who make these bad criticisms because there's a return to doing so.


If I come out and write a book about my research, it will probably sell a few hundred copies to people who do similar research. If I write a book called Why Economics is a Bunch of Nonsense, so I will probably get the front page of The Guardian and it'll sell 100000 copies. So, yeah, there's there's bad incentives here as well as just honest disagreement and misunderstandings.


You said that you thought economists were maybe somewhat worse at communicating their field than other people from other fields are. Why do you think that might be the case?


Oh, that's a good question. I'm not really sure there's not much return to doing this within the economics profession.


Presumably that's true in other fields, too, though. That's that's true. I don't really have a good answer to that question. To tell you the truth, maybe economists are a bit more selfish than people in other disciplines and are less willing to provide the public good. Yeah, I don't really know.


So one thing I just was rereading some parts of Richard Thaler's misbehaving the other night in preparation for this episode. And one thing that he says should I think it's him.


It could be mis attributing this, but probably Richard said that a feature of economics that makes it kind of unique and might contribute to these common conceptions relative to other fields is that unlike other social sciences like psychology or sociology, economics has sort of like a core set of premises or like a core sort of thesis about the world that people are optimizing for what they care about. And so and so it's sort of harder to like strawman psychology as a field because like psychology is just sort of a set of topics that people are investigating, whereas economics kind of has a like a way of looking at the world.


And then they and then you can, like, disagree with their strawman or misunderstand that.


Did that reach a reasonable point? I think that also gets another consideration, which is everyone has an opinion on economics. And when economists disagree with each other, it tends to be in newspapers, whereas when chemists disagree with each other, it doesn't tend to be in newspapers. And most people want to claim to be have a lot of expertise in chemistry. Yeah, but that's that still doesn't answer your question, though, given that's true, I think economists should spend more time trying to explain how we're doing things and pushing back against people who strawman the discipline.


And we just tend not to do that. So I hope more economists follow. Do things like my blog post you referred to and do a little more pushing back, but. Well, I, I'm not holding my breath, so you have to incentivize them to do.


That's true. Economics. Good for.


I so I ran this book club last year. So far I had only the one meeting because I got busy, but I intend to return to it. I called it an elephant book club which was my name for instead of a standard book club where everyone reads the same book and we all discuss it. An elephant book club is where we pick a topic or a question. Then we each read a different book with a different perspective on that topic. And then we sort of summarize the books to each other and discuss them in the name.


Elephant comes from, you know, the the the five elders, like all blind people, all touching different parts of the elephant and insisting, you know, the elephants actually long and skinny or like short and fatter because they're touching different parts anyway. So the topic for that one meeting of my elephant book club was critiques of mainstream economics. So I spent a long time looking for books that would, you know, had some critique of mainstream economics. And I was it was interesting and fun book club.


But the problem that we ran into was that most of the books that we found that ostensibly were challenging economic orthodoxy were things that were sort of already well known and basically just accepted by mainstream economics. And they were sort of packaging themselves, as, you know, shots across the bow at the field. But they were saying things like, you know, GDP is a flawed measure and doesn't capture everything we care about, which, you know, economist will tell you to or tell our Economics 101 students that.


So, yeah. And my question is, are there any critiques like halfway decent, at least critiques of economics as a field as opposed to a specific economist or a specific theory that you think would not be commonly accepted by a by econ?


Right. I don't think there's any one one aspect of bad criticism of economics. It tends to be sweeping denunciation, so this is the entire field is wrong. There's nothing worth their economics is brain damage. It's fake neoliberal pseudoscience, the sort of thing just it's all wrong. And I don't think there are any critiques that follow that mold, that hold any water. But there are a whole bunch of good critiques that are much narrower in focus. So let's see.


So some of them might include things like economists and I've been frustrated by this myself, tend to just overlook other disciplines. So there is lots of work in economics these days which touches on other disciplines such as psychology and sociology and epidemiology. And economists just tend to cite each other rather than going out and seeing what these other scholars have said. So I think we should we're just reinventing the wheel and we should try to be more interdisciplinary in our in our work.


I think it's also true that there's or at least could be true that economists tend to only focus on topics that we can actually say something about. And whether that's actually a good criticism or not is there could also be construed as a defense of economic right.


So it's and what the obvious objection here is, well, what's the alternative if we can't say anything about it? We can't say anything about it. But what I'm getting at here is tractability. So in order for either to try to get something out there statistically or in theory, we have to be able to solve the model. If we can't solve the model, then we don't write the paper because we can't solve the model. But there are some issues that are just really too hard to get at in terms of that sort of quantitative modeling.


And that means that economists have nothing to say about those issues. What's an example? So one example might be the effect of income inequality on political structures. So thinking about not inequality is just how does each person's income affect their their well-being? But how do concentrations of income affect what sort of policies get put into place? It's difficult to model that. It's difficult to get at that empirically. It may or may not be really important in terms of an actual mechanism, but if it is, it is something we should worry about and also seems like political scientists job.


But if anyone should be tasked with figuring out how to study, that is an example actually of what I just mentioned about we need some more interdisciplinary work. It's partially political science and it's partially economics. So hopefully there'd be lots of leeway for scholars in different disciplines to work on that same aspects of that same problem. In terms of just nitty gritty, there's all sorts of things that aren't just broad issues. I can sort of I can sort of talk about such as that, that if I try to just write down a model of some type of decision making, particular decisions that have lots of dimensions or take place over lots of time periods, it turns out to be really difficult mathematically to get at that sort of issue.


So what I would do then is just simplify until I can actually solve the model and I'm wiping out all sorts of things when I do that simplification. So those are important things. Well, I just can't get at them because I need the math to work again. It's not really clear this is all that great a criticism because what's the alternative? If I can't solve the model, the models are useless, but it's still something I think we should keep in mind.


OK, so my original question was, are there any I think I use the word halfway decent or at least halfway decent critiques of economics that aren't already believed and agreed with by mainstream economics?


Oh, well, I'm not sure. I think most economists probably wouldn't agree with those things. I just said so.


Oh, yeah, yeah, yeah. That was a good answer to the question. I just wanted to to modify my question a little bit and ask.


I think the thing I was really trying to grow up towards was, are there any criticisms of the like premises or approach of economics that are not straw manning economics, like the things that economists believe or assume or the the method to the epistemology of the methodology that they think is legitimate or, you know, are there any critiques like that that, of course, you don't have to agree with, but like that at least are not straw manning what economics actually believes?


Sure. Well, one one critique, which I think holds some water, is economists are very quantitative. So to publish any empirical work in economics, it's essentially got to be econometric. It's got to be statistical. You've got to go out and collect data and estimate models using those data. A lot of other disciplines adopt a hybrid approach where they use qualitative methods, which is they may not like this description of this, but this is essentially just going and asking people what happened, why are they doing things?


Economists never do that. Basically, I think just doing that would be problematic. But I'm also a little worried that the way that we do it, we just do. The opposite is also problematic, and maybe we should be a little more open to these sort of qualitative approaches, that's more of an empirical answer than a theoretical answer that still counts in what I was intending to ask about.


I mean, if you can think of any theoretical answer, then I'm certainly interested. But if you can't, that's fine, too.


Yeah, I'm a pretty big fan of the way we do theory. So I, I think it's a lot broader than most people think it is as well. So I think there are a lot of valid criticisms of some theories. But the way we go about doing theory I think is pretty good. And I think most of the reasons that people think we're not doing things well are because they aren't familiar with developments in economics since, say, the 1950s or again, misunderstand the words that economists use to describe their theories.


Things like equilibrium is a big one. I think when people hear that word, they think, oh, economists are saying that the world just approaches some stable state that just never changes. And that's not what the word means at all. In economics. It means usually means something more like people don't have an incentive to systematically change their pattern of behavior. Hmm. So I guess that's not very good answer to that question.


Meaning, but how is that different from the economy or this aspect of the economy will reach a stable state if people have no incentive to change their behavior. Oh, you're saying like there could be external shocks to the system so there can be shocks going all the time.


The economy could be or some narrow aspect of the economy, depending on what we're modeling, might be moving all over the place all the time. But due to this randomness and what I can't observe about the world and my own cognitive limitations and all sorts of things we could add to the model, I don't have a incentive to change how I'm doing things which so my behavior might be changing. But my my strategy, if you will, isn't changing.


OK, can I ask you about a couple specific econ critics and you can share as much of your opinion as you're willing to share.


So one popular book, at least I don't know, 10 years ago, popular critique of economics was debunking economics by Steve King. I think you've written about that.


I've written a lot of criticism of Steve Keim. I don't think there is anything worthwhile in debunking economics. I don't recommend anyone read it for any reason other than seeing one of the worst critiques ever authored of economics. Looks like. Tell us how you really feel. So I think it's the epitome of the straw manning of economics. It's it's a lot of things that you mentioned before that a lot of critics come up with say things that they claim are these deep criticisms of how economists do things.


And it's actually things that economists are well aware of and teach in Economics 101. Some of it is that and some of it is Professor Keene's own novel criticism, which are mostly just based on what I would say or technical errors, technical, like mathematical or just outright mathematical errors.


So, yeah, I don't think a lot of it's. Yeah, but also it's also subject to the problem that it's far too narrow. If you could read debunking economics and have absolutely no idea that at all, that economists actually are mostly do empirical work. Something like sixty five or 70 percent of economic research is statistical going out and getting data on what's going on in the real world and trying to explain what we see in those data. There's not one mention of any empirical work in debunking economics.


OK, what about I don't think there's the book, but at least a website and a term David Sloan Wilson's even nomics.


Yes. I've also so I respect Sloan Wilson and I've read some of his work. He does interesting stuff. He seems like a bright guy and he just seems to just be very resistant to actually figuring out what it is economists are talking about, which is kind of strange because he goes and interviews mainstream economists quite often. And, yeah, never seems to update his priors, if if you will.


What kinds of errors do you think he makes about economics? So he thinks he's one of the sort of people who thinks that all this in mainstream economics is 1950s neoclassical theory. So there's a very influential model in economics called the Arrow Dabru General Equilibrium model. It kind of looks like suppose there's a whole bunch of perfectly competitive markets and they all interact with each other. How does that big economy work? And a major result from that model is the it's the equilibrium is always efficient in the sense that we talked about before.


And this is sometimes construed as a defense of laissez faire political. Politics, so Sloan Wilson basically just keeps saying that economists hew to this model and refuse to consider anything else, and it's very frustrating because that's really not what economic side is all about here.


He also says that economics should be incorporating evolutionary theory like evolutionary biology or psychology. I'm not sure which. Do you know anything about that? And do you think that's a valid point?


Well, I do think that economics should I agree with him. I guess my complaint here is that he seems to think that economists are opposed to this when in fact, there's all sorts of evolutionary arguments in mainstream journals all the time. We could interpret his arguments as there should be more of that. I'm not sure if he's right about that, but the idea that economists are that mainstream theory is somehow inconsistent with evolution or that mainstream journals won't publish evolutionary arguments as well is just not correct.


Some of this actually that gets back to another criticism, which I think of economics, which I think is valid. And and some people have tried to use evolutionary arguments to get out, which is we tend to take preferences as given. They're just bestowed with your your willingness to pay for some commodity preferences are actually socially constructed. It depends on how you grew up and all sorts of influences what you want to do. We usually just ignore that. So one way we can try to get at some of that is by considering why people evolved to have the preferences they do.


So I think there's lots of interesting work there. And I guess I would just ask people like Sloan Wilson to notice that economists are actually doing some of that work.


Is that the way in which evolutionary theory was supposed to be applicable to economics or or was it also supposed to include things like, I don't know, like modeling the change and I'm making this up, but I'm just guessing modeling the change in the type or the number of different kinds of firms over time, the same way like evolutionary biologists would would model the evolution of different species or.


Yeah, so that's the point. I think we could use the word in two different ways here so we can think about biological evolution. Why do human beings behave the way they do in the modern environment or are we think about exactly as you said, we could think about applying those sorts of evolutionary arguments to social phenomena. So we're not looking at genes or maybe even memes, but which firms survive or what strategies survive in the marketplace and that sort of thing.


And I think there's both types of arguments appear not uncommonly anyways in the in the mainstream literature.


OK, interesting. Well, I want to make sure we talk about the critique of economics that we alluded to earlier, which is that economists think people are all perfectly rational agents, homo economicus. So it's possible that you and I have a disagreement about this. But it seems to me that there is some validity to the critique that economists unwarranted model people as rational actors.


So, you know, you can certainly say that, like, look, these these models of people as rational actors are just models. They're simplifications. All models have to have simplifying assumptions. And so we're not saying each individual is perfectly rational, but that, like, you can get pretty good results by modeling people in aggregate as if they're rational actors. And that's what I agree with that. But and that I think that is unfairly neglected by some of these critics.


But at the same time, like if you look at if you read debates between, you know, the sort of new guard behavioral economists well knew those in the last few decades and the you know, originally the old guard, classical economists, their reactions to the behavioral economists who were pointing out these like systematic deviations from rationality in people's reasoning and judgment.


It does seem like, at least at that time, economists were I guess they had like two responses to the to the behavioral economist pointing out irrationality is one was well, those are anomalies, but they don't change the fact that this rationality assumption is the best way to model people in aggregate. And then the other reaction was sort of the things you're calling your rationality are not, in fact, irrationality. And so, like a recent example of that would be when I talked to Robin Hanson about seeming irrationalities like people, you know, aren't willing to pay even a little bit of money to look at.


The success rate of surgery is done by different surgeons at different hospitals. If they're going in for surgery, this seems like something people should be willing to pay money for. And so, you know, I would look at that and say, look, that's evidence of people not being rational, you know, with respect to their own preferences and values. And Robin will look at that and say, well, that's you know, that's proof that people don't actually care about their own health.


They're like they are behaving rationally. It's just that their utility function doesn't include their own health or which to me sounds absurd, but it's not. You know, there's other examples of. Things like that, where the economy will stick to the you know, there's two ways to interpret a behavior. One is people are being irrational and the other is they are being rational. They just have preferences that you might think are absurd or like a discount function you might think is absurd.


And I do think that happens a lot.


What do you think? Well, I think I want to stand back a step first and say rational, this economic jargon. So it doesn't mean the same thing that it means in everyday conversation. It means people are basically minimally consistent behavior. So you earlier said that rationality and homo economicus or the same thing, and they're not exactly the same thing because the latter implies people only care about their narrowly defined selfish material well-being. And there are lots of models certainly where that is what we assume.


But I could also have a rational model where people care about fairness and their health status and all sort and the the the well-being of all sorts of other people. And I can incorporate all sorts of those things into a model of rational behavior, which isn't a model of homo economicus. So I guess with that said, our do do economists argue too much to this model of rational behaviour, broadly defined, not defined in terms of just my own narrowly defined material well-being?


And I don't know. I think it's an interesting question. It's maybe context dependent. I'm not sure I agree with Robin Hansen's take in the anecdote you just talked about, although I am also not familiar with the particular paper you were talking about. I think many economists do tend to tend to try to find rational explanations for behavior. On the other hand, behavioral economics is mainstream economics. So maybe 25 years ago, people were opposed to it and kept it out of mainstream journals.


But it's one of the day their mainstream journals are full of behavioral economics. And I think most behavioral economists would say that that approach is not a competing approach to the mainstream rational choice approach to economic theory. It's a complement to mainstream, rational choice theory. So I guess I'd have to somewhat be agnostic and say, well, I guess it depends on the exact circumstance. I'm not sure I'm willing to come down one way or the other on whether mainstream economics tends to look for rational choice explanations too much.


Hmm. So I guess if we disagree or not. Yeah. I mean, yeah. The question of magnitude, certainly I think economists are more willing to assume rationality or to look harder for rational for for explanations of behavioral patterns in which people really are maximizing their own utility functions relative to most non economists. Explanations of those patterns, whether or not economists are correct to do so is would be another question that we might or might not disagree about. Sure.


I think there's some maybe bad incentives there and that economists really like to find the the quirky, counterintuitive explanation for four things. So saying looking at something and saying, look, people are clearly being irrational here. Well, the incentive is for the economists to think really hard and come up with some way to rationalize that behavior. And then you look clever by looking clever or something that we all want to do.


I can't pretend that I don't feel that pull as well. But so I referred to two explanations that economists often have for seemingly irrational anomalies. And one was the people are actually being rational and the other was maybe, maybe a good different way. To summarize, it would be the classic sort of Milton Friedman defense of the rationality assumption, which is that the the predictions of this model could be correct. Even if the assumptions of rationality are wrong. Why would that be true?


Oh, I think that's commonly true. So if we were trying to model to say we were thinking about just straight up canonical microeconomics, people are going out and choosing bundles of goods to purchase in a marketplace. If I put if I say that people are behaving rationally in that sort of context, I mean something like, well, if you would prefer a bundle a bundle B and bundle B to bundle C, then you must prefer bundle A to bundle C.


Now, if we go in and study people actually buying stuff in marketplaces, they often violate that. They, they, they make purchases which can't be reconciled with straight up rational choice theory. But if I ask a question like what happens to the total number of widgets purchased if the price of widgets goes up, statistically, the pattern of behavior, I'm still going to be able to predict using this rational choice model. I can also just add noise to it.


Usually when I take the model to data so we can loosely think of it as. Well, there's this sort of pure, rational choice, part of how people are making decisions, and then there's just a whole bunch of other stuff and we can all that other stuff is kind of going to average out when we look across enough people so we can still explain patterns using this simplification. I don't think we need to go full Friedman methodology there. I think so.


What you're referring to is sometimes called the F twist, which means Friedman took a standard philosophical argument called instrumentalism and made it even more extreme. But I think what I'm saying is consistent with a bunch of other philosophies of doing science. So we just have a little of them.


It's basically what it's a slightly less extreme version of what Friedman was saying is the predictions of models matter, not the realism of the assumptions in model. OK, great. One more question on the rational interpreting seemingly irrational behavior rationally, a lot of your own research focuses on the economics around addictions like alcohol or smoking or arguably addiction to food. If you want to call it that, you study obesity.


There is a model of that behavior that I think called the rational model of addiction, which assumes that people, you know, a heroin addict is behaving rationally like he's he's optimizing his own utility function. He just, you know, prefers I'm going to butcher this explanation, but feel free to correct it. He just prefers heroin above everything else that he could be doing with his life, including living longer and or he just has a really high discount rate.


So he doesn't value his future utility. And so he is not behaving irrationally. To what extent do you think that is a, the mainstream economic view of addictive behavior and be true, sir?


So that's a great example. So the model is even goofier than the way you described it. One.


OK, sometimes they inadvertently steal man things because I'm trying to explain them in a way that sounds reasonable so that I think it's a great example because it's so this is a model due to Gary Becker and Kevin Murphy from about 30 years ago. And the model is even more ridiculous than you described it. So it's people people don't just use heroin because knowing that it will reduce their lifespan in the model. In fact, people live forever. So we have these infinite, lived, perfectly rational agents who know not only everything about the world today, they know how everything in the world will play out until the end of time.


Further, their their blinked into existence at the beginning of time, knowing how or being able to deduce how everything will play out. So you go ask somebody at the beginning of time before they have used any heroin or whatever, what's going to happen. And they'll say something like, well, when I'm 19, I will choose to become a heroin addict. And then that's what I'm going to do for the remainder of my life. And if you poke me with a stick when I'm lying in the bottom of a ditch, bleeding out my ears and say, do you have any regrets?


I'll say, Well, of course not. I perfectly foretold how all this would happen and I couldn't possibly be happier than I am.


Given these choices I have made in my life might depend on whether they're on heroin or not. When you ask them so they know they're going to become addicts and they choose to do it anyways. There's no there's no information problems and there's no irrational irrationality whatsoever in this model in any sense. So why am I still so this is a very controversial model, even within mainstream economics, because one aspect of it is, well, the government should be hands off here.


We shouldn't do anything to restrict heroin or any other addictive substance, because if we really literally believe this model and nobody really literally believes this model, if you went and asked the late Gary Becker about it, I'm sure he would tell you much the same thing. The purpose of the model isn't to make that prediction or make that policy advice. It's to cut away from reality everything we can to highlight one mechanism. And the mechanism they were really talking about is how prices affect the behavior of addicts.


So if you go talk to some people and say public health related disciplines and ask them about how the price of an addictive good affects the consumption of that good, they'll say there's no effect. People are rational. If you increase the price of alcohol, alcoholics won't respond by reducing their drinking. That stands in contrast to the prediction of the rational addiction model, and it makes further predictions about how future prices will affect today's behavior. And I think this is one of the few areas where economists have actually made a theoretical prediction, which is counterintuitive, and then later went out and found that that prediction is actually true in data.


So the model predicts that if I increase the future price of the addictive good bread addicts will respond by immediately reducing their consumption of that good.


You mean like announcing that next year we're going to add a tax on? Right. So the model says if if the government says on January 1st, we're going to greatly increase the tobacco tax on tobacco, people will respond by immediately smoking less. They might go and hoard cigarettes, but they're going to smoke less of the model says. And I think most people so I teach this every year in health economics classes. And I ask people before I give the reveal, what do you think the model says?


And most people actually predict the opposite. They think something like, oh, well, if my if alcohol is going to become more expensive tomorrow, what I should do is, well, get blind drunk today while I still have the chance. The model says, no, you should do the other thing. So later, about six or seven. Four years after the theory was published, people showed it was true. If if you increase, if you sorry, let me actually use a different example.


About five years after that, people showed in very careful analysis that future prices, future tax changes on tobacco immediately affect behavior only if they're announced, which is exactly what we would expect. So if the government surprises people by increasing the tax while nobody responds to that prior, but if they say six months from now we're going to increase the tax on tobacco, they immediately reduce their consumption.


And is the reason for that because people are trying to prepare themselves so they're not. So it doesn't hit them as hard when the tax when they suddenly can't afford as much as they were used to. Yeah.


So it looks like the addiction is costly to me. One reason is costly as I just have to spend a lot of money to buy my addictive good. So it's more costly to have an addiction to a good which costs lots of money than an addiction to a good which costs less money. So if you tell me it's going to become more expensive in the future, I go, ha, I don't want to wake up six months from now or a three pack a day smoker because it's going to cost me even more money to be a three pack smoker.


So it turns out there's been all sorts of other work on this model and most of it works on relaxing those really severe assumptions that I kind of ridiculed earlier. So instead of having people being perfectly rational, let's make them not be perfectly rational. They don't know everything. They they don't make decisions over time or with or with respect to uncertainty in this way that Becker and Murphey correctly, in my view, first wrote down in the simplest version of this model, and that one prediction always holds or maybe always is too strong, but usually holds when we relax those severe assumptions.


So getting back to where we started this conversation, I think this is the right way to go about it. We we make the simplest model we possibly can first. And the might that it's a very simple model is always going to have all sorts of really goofy assumptions in it. And then we poke at the model and see, well, what happens when we start relaxing things? Do we still get basically the same qualitative predictions out of it?


Yeah, great. Well, Chris, before I let you go, as I think you know, I like to ask all my guests at the end of the episode to nominate some resource, a book or a blog or even a person, a thinker that you have some some substantial disagreements with, but you nevertheless think is valuable to read or engage with. What would you nominate?


I would have to say Joseph Stiglitz. So some people might say that's not fair because I'm maybe a lot of people might think of them as being a mainstream economist. I think for the last 20 years or so, he has spent most of his time criticizing mainstream economics. And I I very commonly disagree with what he has to say. But I also have tremendous respect for Stiglitz. And even when I disagree with them, I have to think about what he's saying.


And sometimes he changes my mind about what I think about things. So this was actually alluded to this earlier when I talked about the political implications of income inequality. If it weren't for reading him, I would just basically ignore that entirely. But he's got me at least worried about the fact that this is something I should be worried about, as he has.


He argued that it for for a particular effect or has he just said this is a thing economists should be focusing on?


He has said both. I think so. He's got a few I don't think he's written any academic papers about it. I could be wrong about that, though. But he has quite a few books where he touches on this. We see here one of them has got inequality in the title, but I forget its name off the top of my head. The price of inequality, I think. Yeah, that's right. So, yeah, I would recommend reading those again.


There are these are things that are hard to get at in terms of economic theory, hard to get at in terms of empirics, but important big issues. And his criticism of mainstream economics is definitely not straw man criticism. He he knows what he's talking about. So even when I disagree with them, we have to take critics like this seriously.


And is there anything that he that you disagree with him about that you'd be able to summarize?


Oh, well, I guess my major disagreement with him is at a meta level, is he? His take is always very political. So I tend to recoil at these highly political takes. But depending on whether or not you agree with his politics, I guess that might be a good thing or a bad thing when reading through his arguments about things such as the social implications of income inequality. OK, great.


Well, we'll link to, do you say the price of inequality. I recommend it. Right. We'll link to that and to your blog with the Post 18 and. Is your reading bad criticism of economics, which has some nice links embedded in the list to examples of of the phenomena you're complaining about, which I appreciated? It does. Chris, thank you so much for joining us.


It's been a pleasure having you. Thank you. This concludes another episode of Rationally Speaking. Join us next time for more explorations on the borderlands between reason and nonsense.