The economic point of view

By accident, I ran into a commencement address by Chicago Economist Kevin M. Murphy: “Seeing the World through the Economic Lens” (June 11, 2006).  It’s not about poetic remarks but about equilibrium, incentives and cost-benefit analysis. These are the final paragraphs of the address:

“So don’t forget the concepts of equilibrium, such as there’s no free lunch. And if it looks too good to be true, it probably is. But that doesn’t mean you shouldn’t push forward. Just be cautious and be humble, because most likely you are going to turn out to be wrong.

On the incentives side, remember that incentives matter. You give people incentives to do good things, and they will do good things. You give people incentives to do bad things, and they will do bad things. And remember incentives apply in all contexts. So, for example, a common response to a public policy problem is to say that the solution is to get the government to do it. But does the government have the incentive to do it right? What incentive do they have? Their incentives often are not to do it right. Their incentive is to do it with a lot of people at a lot of expense, because that’s how they define success in their business. So it’s not that the people in government are bad or evil but rather that they are subject to the same incentives as you and me. You just have to recognize what those incentives are. And when faced with a problem, use the principles of cost-benefit analysis. Think about the true goals, identify the goals, and, most importantly, identify the options and make comparisons between benefits and costs of one option versus another.”

In the same year, Austan Goolsbee gave a very entertaining address: “Why People Hate Economists (and Why We Don’t Care)“:

(Economics is) about a way of thinking about the world. It starts from the basic theory that, for the most part, people try to do better for themselves. If this is true, they will respond to incentives so that, in most cases, competition will drive them to be more efficient. That theory then says: Let’s get the data and think hard about causality, because we don’t have much in the way of controlled experiments. And let’s see how far that will take us.

But that simplicity of purpose is quite a large part of why people hate us. We really don’t deal with the loftiest ideals of humanity. We deal with humans at their most mundane. We aren’t about narratives and inspiration or how people would behave in their finest hours. We are about how people behave in the everyday marketplace. I think we are especially hated because of the nagging fear on the part of idealists that we might be right about people.

(…) But that’s the problem with economics. It’s always taking the fun out of everything. As I like to say, economics is frequently hated but seldom wrong.

Also related, a previous post on Nirvana fallacies, according to Harold Demsetz; and another one on Economic Imperialism, according to Ed Lazear.  So, yes, this maybe a favorite or recurring topic of mine :-).  This is from Ed Lazear:

It is the ability to abstract that allows us to answer questions about a complicated world. As economists, however, we believe in comparative advantage. I have argued elsewhere that the strength of economic theory is that it is rigorous and analytic. But the weakness of economics is that to be rigorous simplifying assumptions must be made that constrain the analysis and narrow the focus of the researcher. It is for this reason that the broader thinking sociologists, anthropologists and perhaps psychologists may be better at identifying issues, but worse at providing answers. Our narrowness allows us to provide concrete solutions, but sometimes prevents us from thinking about the larger features of the problem. This specialization is not a flaw; much can be learned from other social scientists who observe phenomena that we often overlook. But the parsimony of our method and ability to provide specific, well-reasoned answers gives us a major advantage in analysis.

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