Why Kant Was Smarter Than Behavioral Economists

by Mario Rizzo  

Behavioral economists who like to indulge in normative pronouncements have decided that quasi-hyperbolic discounting violates rationality. In other words, suppose a person decides today that he will give up the hamburgers he loves beginning in 2010 (because of the high fat content). But then when 2010 arrives he reverses his decision and continues to eat them.  To stress the point, let’s suppose that he repeats this preference-reversal one or two more times during 2010.  

The poor fellow is, in addition to all his other troubles, violating standard economic rationality.

A Tiger Of A Mistake

by Mario Rizzo  

UCLA economist Matthew Kahn says that there is a “natural experiment” of the power of the income effect in Tiger Woods’s troubles (HT Greg Mankiw). The fall in income from endorsements should result in Tiger Woods playing more golf tournaments. The relative price (or wage) from the latter source remains unchanged while his income falls. If leisure is a normal good, then less income means less leisure and hence more tournaments. 

Possibly. But it is not a test of the labor supply theory. Why not? Economics makes predictions about markets and not individual behavior. This is a mistake often made by behavioral economists. They (and some of their neoclassical brethren) think that the individual hypothesized in the models is a “representative individual.”  

This is quite wrong. As the economist Fritz Machlup argued years ago, the individual here is an imaginary puppet whose only task is to generate predictions about market behavior. (In today’s intellectual landscape we might modify that to include predictions about aggregations of individuals in non-market contexts.)   

So whatever Tiger Woods does there has been no “natural experiment” and no test of Jacob Mincer’s labor economics. We can keep Tiger Woods out of the economics books and leave him in the gossip pages.

UPDATE: Tiger Woods says that he will reduce, not increase, his tournament participation. So I guess Jacob Mincer’s labor economics fails the natural experiment. Hmm.  Now will Professor Kahn adopt my (Machlupian) point of view?

What Is Austrian Economics?

by Mario Rizzo

Many years ago (around 1982, I think) Jerry O’Driscoll and I wrote a paper that was the basis of an American Economic Association session. The paper was called “What is Austrian Economics?” The paper gradually evolved into our book, The Economics of Time and Ignorance.

The purpose of this book was to present Austrian economics in an updated fashion. To do this we needed to do two things: (1) uncover many of the fundamental ideas implicit in the tradition but not, as of then, sufficiently elaborated or made explicit; and (2) confront Austrian ideas with recent developments in economics, both mainstream and outside of the mainstream.

We faced many initial negative criticisms of the book. I will say that I was very disappointed by some of the old-guard reaction to the book. But do not confuse “old guard” with age because some of the greatest encouragement we received was from Professor Ludwig Lachmann who well understood the necessity of going beyond what the previous generation of Austrians had bequeathed us.

Economics as a Philosophical Science

by Gene Callahan

I happened to be reading R. G. Collingwood’s famous essay (at least famous in my circles!) with the above title. While similar in some ways to Mises’s philosophical analysis of the concept of action, there are some quite significant differences present as well, and I thought that Think Markets readers might enjoy a brief discussion of one of them.

Perhaps the most notable difference between Mises and Collingwood is that the latter denies the possibility of interpersonal exchange!

What is Science?

by Jerry O’Driscoll  

Some recent controversies move me to take up the topic within the limitations of a blog post.  Many years ago (1956), Fritz Machlup ably addressed the issue in an essay titled “The Inferiority Complex of the Social Sciences.”  He rejected limiting the term science to particular subject matters or methods.  He concluded that “there is no epistemologically defensible borderline short of the widest meaning of scientific method, defined in the Encyclopedia Brittanica as ‘any mode of investigations by which impartial and systematic knowledge is acquired.’”  

I endorse Machlup’s broad definition of science as any systematic study of a subject.  As he observed in a footnote, the German Wissenschaft is more inclusive: “the historians of literature, the philologists, the philosophers, the mathematicians, the sociologists, they are all scientists (Wissenschaftler).” In French, science is knowledge and one can speak of la science infuse, intuitive knowledge. La science de l’art is simply the systematic study of art.  

Mankiw And Meltzer Are Right! More Or Less

by Mario Rizzo  

As we have been saying here, the claims that the fiscal stimulus has saved or created X number of jobs is not a simple empirical question. It must be an inference from a model that tells us what would have happened in the absence of that stimulus. Collecting reports from various firms or local governments about their job situations will not do. At best these individual reports are based on pop-theories on the part of the reporters about what would have happened.

Mises Was A Scientist

by Roger Koppl

Over at Division of Labor, Noel Campbell picks a fight with Austrian fans of Mises.  “I always conceived of Mises’ efforts as attempting to build a logically correct and (therefore) irrefutable description of human behavior. As such, I always viewed Human Action as a work of philosophy, not science.”   Noel hints that he doesn’t want to be answered with a lot of philosophy of science.  I might whine about how unfair it is to contrast Mises’ “philosophy” with “science” and then expect a response that doesn’t get into the philosophy of science.  But Noel seems to be a nice guy with a sincere question, so I’ll take a stab at it anyway.

The Great Moderation In Macroeconomics

by Mario Rizzo  

I have now read both Paul Krugman’s New York Times essay on the state of macroeconomics and John Cochrane’s reply. They are each, in very different ways, quite disappointing. The level of argument is poor, the prejudices are simplistic, and the tones are annoying.  

Not Prediction But Explanation

by Mario Rizzo

Her Majesty Queen Elisabeth II asked why economists did not predict the current economic troubles. The British academic community (and some in the American) is using this opportunity to discuss views on the nature and limits of contemporary macroeconomics. This is very useful.  

Peter Boettke over at The Austrian Economics summarizes and discusses some of the main issues. I shall not repeat what he says in my post. Everyone should read Pete’s.  

It is convenient for those of us who never thought much of contemporary macroeconomics to support the complaints that the financial crisis and recession was not “predicted” by the Macroeconomics Top Brass. But, as tempting as it is, it would be a mistake.

Should Economists Think About What They Do?

by Mario Rizzo  

Believe it or not, this is a controversial question!

Brad DeLong has argued that the profession seems to know less today about macroeconomics than, say, Keynes did. Paul Krugman has expressed similar sentiments. They see a kind of collective or professional unlearning in the past thirty or forty years. They are right.