Like Pee Wee Herman, act like a jerk

And get on the dance floor let your body work

I wanted to follow up on a remark from a few years ago about the two modes of pop-economics reasoning:

You take some fact (or stylized fact) about the world, and then you either (1) use people-are-rational-and-who-are-we-to-judge-others reasoning to explain why some weird-looking behavior is in fact rational, or (2) use technocratic reasoning to argue that some seemingly reasonable behavior is, in fact, inefficient.

The context, as reported by Felix Salmon, was a Chicago restaurant whose owner, Grant Achatz, was selling tickets “at a fixed price and are then free to be resold at an enormous markup on the secondary market.” Economists Justin Wolfers and Betsey Stevenson objected. They wanted Achatz to increase his prices. By keeping prices low, he was, apparently, violating the principles of democracy: “‘It’s democratic in theory, but not in practice,’ said Wolfers . . . Bloomberg’s Mark Whitehouse concludes that Next should ‘consider selling tickets to the highest bidder and giving the extra money to charity.'”

I summarized as follows:

In this case, Wolfers and Whitehouse are going through some contortions to argue (2). In a different mood, however, they might go for (1). I don’t fully understand the rules for when people go with argument 1 and when they go with 2, but a quick rule of thumb is that when someone seems to be acting like a jerk, an economist will defend the behavior as being the essence of morality, but when someone seems to be doing something nice, an economist will raise the bar and argue that he’s not being nice at all. I’m guessing that if Grant Achatz were to implement the very same pricing policy but talk about how he’s doing it solely out of greed, that a bunch of economists would show up and explain how this was actually the most moral and democratic option.

In comments, Alex wrote:

(1) and (2) are typically distinguished in economics textbooks as examples of positive and normative reasoning, respectively. The former aims at describing the observed behavior in terms of a specific model (e.g. rationality), seemingly without any attempt at subjective judgement. The latter takes the former as given and applies a subjective social welfare function to the outcomes in order to judge, whether the result could be improved upon with, say, different institutional arrangement or a policy intervention.

To which I replied:

Yup, and the usual rule seems to be to use positive reasoning when someone seems to be acting like a jerk, and normative reasoning when someone seems to be doing something nice. This seems odd to me. Why assume that, just because someone is acting like a jerk, that he is acting so efficiently that his decisions can’t be improved, only understood? And why assume that, just because someone seems to be doing something nice, that “unintended consequences” etc. ensure he’s not doing a good job of it. To me, this is contrarianism run wild. I’m not saying that Wolfers is a knee-jerk contrarian; rather I’m guessing that he’s following default behaviors without thinking much about it.

This is an awkward topic to write about. I’m not saying I think economists are mean people; they just seem to have a default mode of thought which is a little perverse.

In the traditional view of Freudian psychiatrists, which no behavior can be taken at face value, and it takes a Freudian analyst to decode the true meaning. Similarly, in the world of pop economics, or neoclassical economics, any behavior that might seem good, or generous (for example, not maxing out your prices at a popular restaurant) is seen to be damaging of the public good—“unintended consequences” and all that—, while any behavior that might seem mean, or selfish, is actually for the greater good.

Let’s unpack this in five directions, from the perspective of the philosophy of science, the sociology of scientific professions, politics, the logic of rhetoric, and the logic of statistics.

From the standpoint of the philosophy of science, pop economics or neoclassical economics is, like Freudian theory, unfalsifiable. Any behavior can be explained as rational (motivating economists’ mode 1 above) or as being open to improvement (motivating economists’ mode 2 of reasoning). Economists can play two roles: (1) to reassure people that the current practices are just fine and to use economic theory to explain the hidden benefits arising from seemingly irrational or unkind decisions; or (2) to improve people’s lives through rational and cold but effective reasoning (the famous “thinking like an economist”). For flexible Freudians, just about any behavior can be explained by just about any childhood trauma; and for modern economists, just about any behavior can be interpreted as a rational adaptation—or not. In either case, specific applications of the method can be falsified—after all, Freudians and neoclassical economists alike are free to make empirically testable predictions—but the larger edifice is unfalsifiable, as any erroneous prediction can simply be explained as an inappropriate application of the theory.

From a sociological perspective, the flexibility of pop-economics reasoning, like the flexibility of Freudian theory, can be seen as a plus, in that it implies a need for trained specialists, priests who can know which childhood trauma to use as an explanation, or who can decide whether to use economics’s explanation 1 or 2. Again, recall economists’ claims that they think in a different, more piercing, way than other scholars, an attitude that is reminiscent of old-school Freudians’ claim to look squarely at the cold truths of human nature that others can’t handle.

The political angle is more challenging. Neoclassical economics is sometimes labeled as conservative, in that explanation 1 (the everything-is-really-ok story) can be used to justify existing social and economic structures; on the other hand, such arguments can also be used to justify existing structures with support on the left. And, for that matter, economist Justin Wolfers, quoted above, is I believe a political liberal in the U.S. context. So it’s hard for me to put this discussion on the left or the right; maybe best just to say that pop-econ reasoning is flexible enough to go in either political direction, or even both at once.

When it comes to analyzing the logic of economic reasoning, I keep thinking about Albert Hirschman’s book, The Rhetoric of Reaction. I feel that the ability to bounce back and forth between arguments 1 and 2 is part of what gives pop economics, or microeconomics more generally, some of its liveliness and power. If you only apply argument 1—explaining away all of human behavior, however ridiculous, as rational and desirable, then you’re kinda talking yourself out of a job: as an economist, you become a mere explainer, not a problem solver. On the other hand, if you only apply argument 2—studying how to approach optimal behavior in situation after situation—then you become a mere technician. By having the flexibility of which argument to use in any given setting, you can be unpredictable. Unpredictability is a source of power and can also make you more interesting.

Finally, I can give a statistical rationale for the rule of thumb given in the title of this post. It’s Bayesian reasoning; that is, partial pooling. If you look at the population distribution of all the things that people do, some of these actions have positive effects, some have negative effects, and most effects are small. So if you receive a noisy signal that someone did something positive, the appropriate response is to partially pool toward zero and to think of reasons why this apparently good deed was, on net, not so wonderful at all. Conversely, when you hear about something that sounds bad, you can partially pool toward zero from the other direction.

Just look at the crowd. Say, “I meant to do that.”