Techdirt Reading List: Economics Rules: The Rights And Wrongs Of The Dismal Science

from the economics-is-fun dept

We’re back again with another in our weekly reading list posts of books we think our community will find interesting and thought provoking. Once again, buying the book via the Amazon links in this story also helps support Techdirt.

This week, we have Harvard Professor Dani Rodrik’s excellent new book Economics Rules: The Rights and Wrongs of the Dismal Science. We write and talk a lot about economics around here, and we’ve recommended a number of economics or economics-related books. I’ve also argued in the past that economics should be a key subject taught in schools, if only because so many people (especially policy makers) seem to have trouble understanding the concept of tradeoffs, which are so key to understanding economics.

Of course, economics is also somewhat controversial. Sometimes it’s described more like a science, and other times as a more wishy-washy “social” science, and then, to many, it’s nothing but a scam. The fact that economists rarely agree on things certainly doesn’t help matters. Add to that fact the various disciplines within economics, which sometimes appear to be contradictory (even if they’re often not), and many outside of the field like to dismiss the concept of economics entirely, even when it actually is incredibly valuable in understanding the world around us and the options around various policy choices. And that’s where Economics Rules is such a valuable addition to the thinking about economics.

Rodrik does a really great job laying out where much of the confusion and misunderstanding comes from, highlighting how economics is — very much purposely — about building models. But models, by their very nature, are not the complete picture of everything. They are limited models, which are very, very useful… in specific circumstances. When you need a map telling you how to drive to the doctor, you don’t need a map that shows you changes in elevation. That information may be more accurate, but isn’t very useful. So the crux of Rodrik’s argument is that different economic models are useful in different situations, and if we just spent more time focusing on making sure people were using the right model in the right situation — rather than looking for the grand unified perfect model that explains everything, economics would be a lot more useful in general.

The book is great in that it’s useful both for people who aren’t that familiar with economics — to help them understand why it’s useful and when it’s not so useful — as well as those who are deeply familiar with economics. For the latter, it’s really useful for getting people to step away from steadfast devotion to certain models in areas where they might not really apply, where assumptions may not line up and where the key variables may actually be different. Personally, I found it quite useful in shaping my own thinking about economics and economic issues.

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Comments on “Techdirt Reading List: Economics Rules: The Rights And Wrongs Of The Dismal Science”

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Mason Wheeler (profile) says:

Re: It is very dismal

Precisely. Case in point: “incentives.”

The prevailing economic theory in developed nations is that people act in response to incentives, and that if you rearrange the incentives, it will change the aggregate behavior of the people in question. While this is obviously a useful way to model human behavior up to a certain point, it’s all too common to not understand where that certain point is.

For example, the incentives theory says that if interest rates are low and inflation is high, you will have a stronger incentive to take on debt and spend money than if interest rates were high or inflation low. So ever since the financial crash of 2008, the US Federal Reserve has been taking widespread measures to suppress interest rates and create inflation… and yet the inflation hasn’t shown up and people aren’t borrowing and spending.

Why? Because we’re at a point in the USA where this particular incentive is essentially equivalent to “pushing on a rope.” Consumer spending–the largest segment of the economy–is driven by the largest segment of the consumer base, which is, as it has been for decades, the Baby Boom generation. But they’re getting into retirement age, or at the very least seriously-preparing-for-retirement age, which is a time when you want to spend less, save more, pay down debts rather than take on new ones, and set your financial house in order to attempt to secure your future.

Of course trying to create incentives for someone to very obviously act against their own best interest isn’t going to work! (Particularly when doing so for a massive group of people.) And yet the theory doesn’t take this into account, so people keep trying it and it keeps not working…

Mason Wheeler (profile) says:

Of course, economics is also somewhat controversial. Sometimes it’s described more like a science, and other times as a more wishy-washy “social” science, and then, to many, it’s nothing but a scam.

They say that an economist is someone who can authoritatively explain to you tomorrow why the thing he authoritatively predicted yesterday didn’t end up happening today.

Wendy Cockcroft says:

Re: Re:

That’s probably because to many people economic “schools” are a religion, That Which Must Not Be Questioned.

One presumes that an economist who authoritatively explains to us tomorrow why the thing he authoritatively predicted yesterday didn’t end up happening today exceeded the limit of his knowledge, and that makes it okay.

I find it hard to put my faith in any economic theory that’s based on ideological considerations and doesn’t describe the world we actually live in.

Lawrence D’Oliveiro says:

Economics + Psychology = Becoming Science

Both economics and psychology have recently been accumulating more and more empirical evidence of how people’s minds actually work, as opposed to how we assumed they work. And the nice thing is, the two are feeding back into each other, to the benefit of both.

For example, we know the whole “rational economic man” idea is a load of nonsense. What replaces it will have to be much more subtle and nuanced. And grounded in scientific reality, not ideology.

Anonymous Coward says:

herd mentality

Much of economics seems to be a herd mentality, which can sometimes defy common sense. One of the things that still sticks in my mind that the card-carrying economists were all in agreement on was the idea that upon the breakup of the Soviet Union, the best way to transition from communism to capitalism was to undertake a so-called “shock therapy” approach. To me (a young whippersnapper with no qualifications to have an opinion) it seemed like an obvious recipe for disaster, but I could never convince my economics professor, who was a straight-shooter in that field (though oddly enough, he thought the established medical profession was pure bunk) even as my earlier predictions were coming true.

It certainly doesn’t bode well for any predictive ‘science’ that when put to the test, the more-educated turn out to be far dumber than the less-educated. Though it’s entirely possible that “shock therapy” economic theory was actually crafted by military strategists rather then economic experts, and the post-Soviet economic collapse was by design rather than by accident.

Wendy Cockcroft says:

Re: herd mentality

The end of the Cold War came about because the Soviet Union lost a game of economic chicken. Turns out you cannot centrally plan an economy and that turning over control of anything to anyone based on their adherence to ideology is downright stupid.

Due to our relative personal autonomy and the fact that economic development was organic and incremental, we had more money to spend on the arms race than they did. They ran out of dosh and out of steam.

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