Monday, April 21, 2014

The contradiction in economics

Somehow a graduation speech by Tom Sargent (nobel prize in Economics in 2001) from back in 2007 made it to Vox two days ago and it has been reposted by several bloggers. The article in Vox did not include the full speech but just listed the 12 valuable lessons that economics has taught the world. While some have found those lessons interesting and insightful, others have criticized them as either too simplistic, partial or just wrong (among the critics, Noah Smith, Paul Krugman or Chris Dillow).

I share some of the criticism that have been raised by others but my initial reaction was different. Several of the 12 lessons that Sargent lists are about individual behavior and decision making (not even about how individual behavior affects economic outcomes). For example, "individuals face trade offs" or "many things that are desirable are not feasible" or "people are satisfied with their choices".

Why is it that economics is so good at understanding individual behavior is already a puzzle, but my real concern is the following: if these are the lessons that economics has taught the world, how do people who have not learned those lessons behave? Is it the case that someone who has not been taught economics does not understand the existence of trade offs? And if this is true, why do economists tend to assume that everyone is so good at decision making?

This contradiction in economics is present when academics write complex mathematical models. It takes a PhD in economics and a lot of hard work to solve these model and we are rewarded by being the first ones who figured out how to solve them. But in these models we assume that every individual in an economy is capable of solving for the equilibrium! Somehow in our models everyone has already learned all the lessons of economics.

Antonio Fatás