Let's not emphasize behavioral economics By Scott Sumner

The Atlantic has an article decrying the fact that economists are refusing to give behavioral economics a bigger role in introductory economics courses. I’m going to argue that this oversight is actually appropriate, even if behavioral economics provides many true observations about behavior.

The core ideas of economics are extremely counterintuitive and are not accepted by most people. Thus economists face a difficult challenge in teaching the subject to non-economists. As an analogy, quantum mechanics seems very counterintuitive to me, and thus I have great difficulty in understanding the subject. It’s hard work teaching basic economics.

Most people find the key ideas of behavioral economics to be more accessible than classical economic theory. If you tell students that some people have addictive personalities and buy things that are bad for them, they’ll nod their heads. And it’s certainly not difficult to explain procrastination to college students. Ditto for the claim that investors might be driven by emotion, and that asset prices might soar on waves of “irrational exuberance.” Thus my first objection to the Atlantic piece is that it focuses too much on the number of pages in a principles textbook that are devoted to behavioral economics. That’s a misleading metric. One should spend more time on subjects that need more time, not things that people already believe.

The article suggests that behavioral economics could be very useful to policymakers. I see little evidence for this claim. The author mentions the housing bubble, but how would behavioral economics have helped policymakers in that scenario? If even the “masters of the universe” on Wall Street struggle to come up with behavioral finance theories capable of beating the market, does anyone seriously believe that bureaucrats in Washington will be able to “market time” well enough to spot asset price bubbles and regulate accordingly? If so, we should provide them with a nest egg to invest and tell them that from now on they’ll earn no salary, rather they’ll have to survive on their profits from shorting asset price bubbles.

Seriously, the problems in 2008 were due to things like moral hazard in the financial system and unstable NGDP growth, which are well covered by conventional, non-behavioral economics. And even if housing prices in 2006 were a bubble, it certainly didn’t cause the 2008 recession. The Fed could have offset the effects of the housing slump with easier money in 2007 and 2008.

Politicians already tend to believe behavioral economic theories. Indeed there are many public policies that are almost entirely based on behavioral economics, most notably the war on drugs. Politicians believe that people foolishly consume addictive drugs, which is why they have enacted laws that led to the imprisonment of 400,000 Americans in an attempt to stop this “irrational behavior”. Has it worked?

Behavioral theories are sometimes used to justify policies that encourage saving. And indeed some companies now make the adoption of a company pension the default option for newly hired employees. Unfortunately, our government actually has a policy of discouraging saving. Behavioral economics tells us that public policy should be more pro-saving, but then so does conventional economics.

Whenever I speak with non-economists, they almost always seem more enthusiastic when the discussion comes around to behavioral economics. “That’s what economists should focus on!” They all seem to think that economists assume too much rationality, and that we should switch to a more behavioral approach. But here’s the problem. Non-economists also tend to reject the central ideas of basic economics, and for reasons that are not well justified. For the economics profession, our “value added” comes not from spoon feeding behavioral theories that the public is already inclined to accept, rather it is in teaching well-established basic principles of which the public is highly skeptical. Thus we should try to discourage people from believing in the following popular myths:

1. People don’t respond very strongly to economic incentives. (I.e., the demand for life-saving drugs is very inelastic.)

2. Imported goods, immigrant labor, and automation all tend to increase the unemployment rate.

3. Most companies have a lot of control over prices. (I.e. oil companies set prices, not “the market”.)

4. Policy disputes over taxes and regulations are best thought of in terms of who gains and who loses.

5. Experts are smarter than the crowd.

6. Speculators make market prices more unstable.

7. Price gouging hurts consumers.

8. Rent controls help tenants.

These myths are all widely believed by the general public. Teaching behavioral economics is not a good way to get people to “think like an economist”, indeed it gets in the way. Our primary goal should not be to add new information, it should be to have people unlearn false ideas about the world. I’m not knowledgeable enough to have a good overview of the utility of behavioral economics. But even if it is useful it doesn’t really belong in a principles of economics course, except as a way of briefly acknowledging that the rational choice model is a useful fiction and not a perfect description of human behavior. We first need to teach basic economic principles.

That doesn’t mean that I agree with the way that economics majors are currently being taught. Our intermediate level courses are far too theoretical; they waste students’ time on lots of minor theories that would only be useful for people planning to do graduate work in economics. (Most students do not.) Too many homework problems with Cobb-Douglas utility, Hicksian demand, marginal rates of substitution, Giffen goods, gross substitutes, indifference curves, etc. Some of that is appropriate, but all economics courses should focus heavily on applied economics. Outside of grad school, every course should be taught as if it’s the last time students will ever encounter those theories, because it usually is. Just teach enough theory for students to handle the applied courses in their major.

When I was young, an intermediate micro textbook by Deirdre McCloskey was less mathematical than many current books, and did a nice job of providing an interesting set of applications. When I look at what young economics students are forced to learn today, I feel sorry for the millennials.

Indeed we’d probably be better off using principles texts for our intermediate economics courses. Teach out of the exact same book as in the principles courses, but do so at a higher intellectual level. Just as a literary scholar might re-read Hamlet 50 times, each time gaining a deeper understanding.