What does economics do? Part 1 of N

One of the hot topics inside economic sociology (or, where economic sociology meets the sociology of knowledge/science/expertise) is the idea of performativity, and in particular, the performativity of economics. In simplest (and not uncontroversial) terms, performativity refers to the way in which a piece of knowledge affects the world, and in particular, the part of the world it claims to ‘know’. Donald MacKenzie, a sociologist of science and financial economics in particular, distinguishes three types of performativity. Here’s orgtheory superstar and economic sociologist Kieran Healy’s description of the three types, from a lengthy piece on MacKenzie’s new book:

MacKenzie distinguishes three kinds of performativity: “generic,” “effective” and “Barnesian” (together with the latter’s negative complement, “counterperformativity”). Generic performativity means the active use of some bit of theory not just by economists but also by economic agents, policy makers and the like. Effective performativity requires that the use of theory not just be window-dressing: it must “make a difference” (18 ) in practice. Finally “Barnesian” performativity (named for Barry Barnes) requires that the use of economics actively alter processes “in ways that bear on their conformity to the aspect of economics in question” (19). That is, the model or theory must bring participants into line with its picture of the world. In that case the model helps make itself true, in the sense that before the its public appearance the system did not behave in accordance with the model’s predictions, whereas subsequently it does.

Sociology and “The Gods Must Be Crazy”

So today I had the opportunity to watch The Gods Must Be Crazy twice in a row. I was subbing at a local middle school (my brother is a math teacher there) and the kids are doing a unit on Africa. As a movie on Africa, I think it is interesting but maybe problematic. As a movie about economic sociology, however, I think it’d be really interesting.

Some Thoughts on “A Perilous Progress: Economists and Public Purpose in 20th Century America”

So in my brief pause between courses and starting in on my very long prelim reading list, I’ve been trying to read up on the history of the economics profession. Other than David Warsh’s excellent, but specific, book Knowledge and the Wealth of Nations (a history of economists’ understanding of growth and knowledge and the connection between the two), Michael Bernstein’s A Perilous Progress: Economists and Public Purpose in 20th Century America is the first book-length history of economics I’ve read*. With that in mind, I’m not going to try and assess the accuracy of Bernstein’s historical account, but rather summarize some of the most interesting threads in his tale and try to see if I can make sense of them.

Teaching Equality vs. Efficiency (Or, What Happens When You Learn Economics)

Recently, I posted about the effect of learning Economics (“Blasts From Research Past: Economists Free Ride Does Anyone Else?”) on selfishness and related behaviors. Today I came across a brand new study that tries to tackle the same questions, but manages to deal more effectively with the self-selection problems. Three researchers looked at Yale Law Students and their behavior in a set of “dictator” games, where each player has the opportunity to give up some or all of his chips to give some to the other, and the amount the other player received varied (e.g. sometimes giving up 1 chip gave the other player 2). Yale Law Students are randomly assigned first-year teachers in Contracts and Torts. Some of these professors are economists or are affiliated with Law and Economics as a field, while others are trained in the humanities. By comparing students taught by economists vs. humanities folks, the researchers teased out the selection problem (somewhat, anyway, these are all people who went to Yale Law) and came up with some findings. Here’s one of the authors talking in Forbes:

The students made 50 decisions about giving. In some cases students started with $10, and for each dollar they gave up, their (anonymous) partner in the game would get, say, $5. In this case, giving was “cheap.” In others, giving was expensive (each dollar given up yielded only 20 cents for the partner).

Someone who gives a lot when it’s cheap and keeps most of the pie for himself when giving is expensive focuses on efficiency: He’s making sure the maximum amount is paid out to him and his partner combined. Someone who keeps 80% of the pie when it would be cheap to give is more focused on equality. Someone who always keeps everything, regardless of the price of giving, is just plain selfish, the very embodiment of the rational, self-interested Homo economicus.

It turns out that exposure to economics makes a big difference in how students split the pie, in terms of both efficiency and outright selfishness. Students assigned to classes taught by economists were more likely to give a lot when it was cheap to do so. But they were also much more likely to take the whole pie for themselves.

And here’s the draft version of the article, “Exposure to Ideology and Distributional Preferences”. Another quote, from the conclusions to the paper,

While this unified theory remains a long way off, our experiments make two important contributions towards such a theory. First, they provide stronger evidence than any previous work that persons’’ distributional preferences are learned. They are not …fixed by deep and immutable background factors (such as early childhood experiences or even genes) but rather evolve, including in mature adults, in response to more recent and superficial stimuli. Moreover this evolution can be characterized not just causally but normatively, in the sense that the stimuli to which students’’ distributional preferences respond include (among other things, to be sure) normative arguments in favor of the preferences that the students eventually adopt.

Second, and equally important, our experiments yield insights into what students learn from teachers who emphasize different ideological content. Crucially, the difference between economic and humanist teaching is not just that economics encourages students to become more selfish, although this is one of our …findings. Rather than identifying a simple difference between immoral economics and moral humanities, our study reveals that an important part of the difference between these disciplines is that they instill competing conceptions of impartiality in those who study them: students exposed to economics are relatively more likely to adopt distributive preferences that emphasize efficiency; whereas students exposed to the humanities are relatively more likely to adopt distributive preferences that emphasize equality.

The Problem With (Revealed) Preferences – Schelling vs. Varian

One of the most interesting aspects of economics, to me, is the model of humanity it puts forward and claims as (nearly, perhaps) universal. Homo economicus has both normative and positive aspects, depending on the particular author, model and time period. I am particularly interested in those claims that seem innocuous but actually elide much of the nuance of human behavior.

From Homo Economicus to Homo Genomicus? Free Will vs. Your DNA

Fans of musicals will most likely remember the endearing West Side Story song, “Gee, Officer Krupke”. In the song, the juvenile delinquent Jets explain to the forces of the law that their delinquency is not their own fault but rather, as the pretend psychologist says, “Society’s played him a terrible trick, And sociologic’ly he’s sick!”* With this song, The West Side Story (unintentionally, we can assume) enters headlong into one of the most pernicious and annoying debates in the social sciences – structure vs. agency.

The form of this debate goes along lines something like this: Someone argues that a large structure of society (class, caste, etc.) determines the behavior of those people enmeshed in that structure. Someone else argues that, wait, you’ve forgotten agency! People have free will, don’t they? If they didn’t, why would there ever be deviation, innovation, or resistance? And the argument sallies forth from there, arguing about the relative importance of particular structures, mobilizing other structures to explain residual variation (for example, explaining the actions of women of color as some sort of interaction between the two structures of race and gender), etc.
In this post, I’m going to talk about various notions of responsibility, agency and determinism. Terms are usually poorly defined, and often the level of analysis varies widely between the two arguments (trying to explain societal level outcomes vs. trying to explain individual decision-making, for example).

I personally find the whole argument a little baffling. As much as class or gender are not the most rigorous of scientific concepts (compared to, say, the electron), they are still miles apart from ‘agency’ or ‘free will’ in the commonsense usage. What role can free will play in an explanation of society? Why does the argument “you’ve forgotten agency!” still play so well in these circles? One reason, I think, for the continued persistence of this argument has to do with enduring enlightenment ideas of free will and rationality. And that brings us to homo economicus, at least momentarily.

Blasts From Research Past: “Economists Free Ride, Does Anyone Else?”

Reading through an excellent 2005 paper by Ferraro, Pfeffer and Sutton* on the way that social science theories in general, and economic theories in particular, can make themselves true when previously they were not, I came across a fabulous social psychology article they cited. The 1981 article, Economists Free Ride, Does Anyone Else?, by Marwell and Ames (M&A) analyzes the results of 11 different variations on a single experiment involving the provisioning of a public good. The experiment was designed to maximize the likelihood of free riding – participants were given detailed explanation several times about the options for the investment of a small amount of tokens (worth a few pennies each, depending on the experiment) into either a collective or individual fund, such that investing 100% into the collective fund produced the maximal total payout.

Fairness and The Ethics of Taxes

Philosophy professor Kwame Appiah has an interesting piece in today’s Washington Post about the psychology and economics of fairness. Also, he cites Thomas Schelling, which I am always a big fan of. Here’s the first part of the essay:

If You Think Your Taxes Are Unjust, Just Think Again – washingtonpost.com:

Is the U.S. tax code fair? That question is always in the air at this time of year, as Americans grumblingly prepare their tax returns and politicians promise them gentler, or at least more equitable, tax policies in the future. But how do we decide what’s “fair”?

It’s a trickier question than it appears at first. Over the past few decades, behavioral economists and social psychologists have shown that our sense of fairness is both powerful and easily manipulated.

In the 1970s, the Nobel Prize-winning economist Thomas Schelling used to put some questions to his students at Harvard when he wanted to show how people’s ethical preferences on public policy can be turned around. Suppose, he said, that you were designing a tax code and wanted to provide a credit — a rebate, in effect — for couples with children. (I’m simplifying a bit.) In a progressive tax system such as ours, we try to ease the burden on the less well off, so it might make sense to adjust the child credit accordingly. Would it be fair, do you think, to give poor parents a bigger credit than rich parents? Schelling’s students were inclined to think so. If the credit was going to vary with income, it seemed fair to award struggling families the bigger tax break. It would certainly be unfair, they agreed, for richer families to get a bigger one.

Then Schelling asked his students to think about things in a different way. Instead of giving families with children a credit, you’d impose a surcharge on couples with no children. Now then: Would it be fair to make the childless rich pay a bigger surcharge than the childless poor? Schelling’s students thought so. But — hang on a sec — a bonus for those who have a child amounts to a penalty for those who don’t have one. (Saying that those with children should be taxed less than the childless is another way of saying that the childless should be taxed more than those with children.) So when poor parents receive a smaller credit than rich ones, that is, in effect, the same as the childless poor paying a smaller surcharge than the childless rich. To many, the first deal sounds unfair and the second sounds fair — but they’re the very same tax scheme.

The article goes on to argue that the Republicans manage to win the repeal of the estate tax not because of a clever renaming (“death tax”) but rather based on arguments that the income had already been taxed once. It was unfair, they argued, to tax it a second time. It’s strange to think that a cut that gave money back to only the top 2% was won on the grounds of fairness, but there it is. Maybe one lesson we can draw from this is that, in some sense, fairness is in the framing, not the substance. That reasoning places a high explanatory weight on rhetoric, but what else can we do when, as Schelling artfully demonstrates, the exact same policy position can sometimes be made to sound incredibly fair and progressive, or  incredibly unfair and regressive.

Or perhaps there are some differences we can think through – the estate tax repeal created a specific redistribution effect (towards the super rich from everybody else). So somehow there was a notion of procedural fairness in the estate tax debate (not taxing income twice, combined with money transfers within a family not being some form of payment) that did battle with a notion of distributive or substantive fairness. In this case, process won out, but it’s harder to say then that it was simply fairness vs. unfairness. I would like to see some evidence that defenders of the estate tax really used the language of self-interest to argue against the repeal. Even so, these arguments are always so messy. Attributing causation to rhetoric or ideas seems to be really tricky. What a shocking conclusion…

Some Thoughts on Somers and Block 2005, “From Poverty to Perversity”

After pausing for a week to focus on class work, I just today finished an excellent article by sociologists Peggy Somers and Fred Block. The 2005 ASR article, From Poverty to Perversity: Ideas, Markets, and Institutions Over Two Centuries of Welfare Debate focuses on two historical moments where national debates on poverty and welfare led to severe curtailings of welfare benefits. The two moments are 1830s England and 1990s America, and thus very different in almost all respects. The unifying feature was a change in the understanding of the link between poverty and welfare, in particular, the acceptance of the ‘perversity thesis’ – the idea that welfare makes poverty, not the other way around. Somers and Block trace the argument back to Thomas Malthus’ famous 1798 An Essay on the Principle of Population, where Malthus argued (amongst other things) that welfare encourages the poor to reproduce beyond their means in order to receive more welfare funds, and encouraged the poor not to work (thus turning the poor into the perverse). In the 1990s, this same idea was repackaged under the heading of ‘welfare queens’ and similar ideas.

$19.95, Mental Anchoring, and Rationality Failure in Everything

An interesting tidbit of research til I have a bit of time to write up some more substantive thoughts, via Scientific American (with a hat tip to Economist’s View). The article title is a bit of a misnomer, it’s really about the effect of seeing a price like “$19.95″ vs. “$20″.

Why Things Cost $19.95: Scientific American:

Janiszewski and Uy ran a series of tests to explore [their ideas about anchoring and prices, read the rest of the article for more details]. The experiments used hypothetical scenarios, in which participants were required to make a variety of “educated guesses.” For example, they had subjects think about a scenario in which they were buying a high-definition plasma TV and asked them to guesstimate the wholesale cost. The participants were told the retail price, plus the fact that the retailer had a reputation for pricing TVs competitively.

There were three scenarios involving different retail prices: one group of buyers was given a price of $5,000, another was given a price of $4,988, and the third was told $5,012. When all the buyers were asked to estimate the wholesale price, those with the $5,000 price tag in their head guessed much lower than those contemplating the more precise retail prices. That is, they moved farther away from the mental anchor. What is more, those who started with the round number as their mental anchor were much more likely to guess a wholesale price that was also in round numbers. The scientists ran this experiment again and again with different scenarios and always got the same result.

Why would this happen? As Janiszewski and Uy explain in the February issue of Psychological Science, people appear to create mental measuring sticks that run in increments away from any opening bid, and the size of the increments depends on the opening bid. That is, if we see a $20 toaster, we might wonder whether it is worth $19 or $18 or $21; we are thinking in round numbers. But if the starting point is $19.95, the mental measuring stick would look different. We might still think it is wrongly priced, but in our minds we are thinking about nickels and dimes instead of dollars, so a fair comeback might be $19.75 or $19.50.

I am reminded of Wal-Mart’s strategy of “Opening Price Points”. Wal-Mart will have one product in a category (say, DVD players) that is exceptionally cheap, cheaper than anything offered by their competitors. But then, next to that product, they will have similar, and increasingly expensive products that look nicer, have better features, etc. Customers assume that because the first product is such a great deal, and so cheap, that the other products must also be cheaper than the equivalent at competing stores, even when this turns out not to be true.

It makes me wonder how much psychology research large corporations fund and, if not very much, why?