Market Power

Musings by an academic economist on the power of markets and the power over markets.

Wednesday, April 06, 2005

Note to Self - Stop Thinking Like an Economist

This morning's Wall Street Journal had a letter to the editor from Luis Suarez-Villa, a professor of social ecology at the University of California - Irvine:

Harvard President Larry Summers is now discovering what many economists find out to their dismay when they venture out of the old-boy network that is American economics. Musings that are considered "normal" among economists tend to be regarded as insensitive or even prejudiced in many other disciplines. At the root of his remarks is the fact that Mr. Summers's thinking is grounded in a discipline that has little sense of fairness and moral obligation, where discriminatory situations are often accepted as the result of Darwinian mechanisms that should be left untouched.
It's not that we have little sense of fairness. It's that we realize that we aren't the moral stewards of the world - and we realize that one person's fairness is another person's foul. Why is it fair to raise the minimum wage and thereby throw people out of work? Why is it fair to attack Sam's Club for selling gasoline at a low price just to maintain the profit margins of small gas-station owners? We also realize that by trying to codify notions of fairness, more often than not, inefficiencies creep in that end up doing more harm than good.

Mr. Summers could have blamed his training in economics for his insensitive remarks, based on the discipline's inability to understand fairness and shed its pseudo-scientific ways.
What does it mean to be pseudo-scientific? By using the scientific method, people observe a phenomenon, develop a hypothesis about what was observed, and gather data - experimental or not - to test the hypothesis. It is not necessary for each and every person who examines a subject to utilize each and every step of the scientific method. One researcher may gather data and realize that there is some systematic relationship between two things. Another researcher, may develop a theoretical explanation about what was observed, and another researcher may gather a different set of data to see if the systematic relationship is at play there. What matters in using the scientific method is that all three steps, observation, hypothesis generating, and hypothesis testing, get used. Economics utilizes every single bit of the scientific method, so I don't know what is meant by "pseudo scientific" (other than being an obvious put-down).

Economists are scientists in that we seek explanations for things that we observe and we seek predictions based on our explanations. For example, suppose we observe that a woman is earning less than a man. Economists want to know why. We don't start off by immediately saying "IT MUST BE DISCRIMINATION!" Instead, we try to reason through the various things that could affect what we observe to learn to what extent discrimination and non-discriminatory voluntary choices (among other things) affect what we observe. That way, if policies are necessary to correct something, they can be more efficiently targeted.

Aristotle said "The law is reason without passion." That may be an accurate way to describe the law, but it is just as accurate, if not more-so, to describe economics in the same fashion.