Thursday, January 30, 2003

Getting Economics Wrong

Here is a fantastic article by Arnold Kling on something that's been occupying my mind a lot these days: why are people so bad at economics?.

A peculiar wrinkle that Kling does not mention is that in people's actions, they behave pretty much like the classical forward-looking rational economic actors, but in people's words they become, well, all sorts of other things. While it's reasonable to divide up interpersonal transactions into "communal sharing, authority ranking, equality matching, and market pricing" in reality we don't see people buying food at a supermarket and then sharing it equally with passers-by. People tend to act selfishly and in their own best interests (which includes things like altruism and being nice to your family) but their speech seems to be more about signaling which group they belong to and jostling within that group for status. So people's lack of economic intuition does little to hinder their day-to-day actions, but means their policy prescriptions are usually wrong.

Alas, I also share Kling's pessimism that education will do little to rectify the situation. Krugman, DeLong, and a bunch of my fellow Chicago MBAs have excellent economic training, but when it comes to some abstract point with ideological (and thus, identity based) overtones, all of that gets tossed out the window.

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