Reasoning Economically

Or What Economists Do

What the heck do economists do is a question that does not baffle many people because they “know” what economists do. I know it did not baffle me. I was not taught economics in high school, and had an entirely forgettable few lectures ostensibly on economics sometime during my undergraduate in engineering. Given this ignorance, I had a vague notion that economics had something to do with money. I think I conflated economists with finance people and accountants. But I was not baffled because I was too ignorant.

Later, while reading popular non-fiction works related to ecology and economics, I slowly got introduced to the writings of economists. It started dawning on me that fundamentally economists study human behavior. Money is important but not central to the study of economics, I realized. Economists come in all different shapes and sizes and they provide various functions in an economy, just as doctors come in a wide variety of types and provide a range of functions in the theory and practice of medicine.

There are doctors who do pediatrics, and there are doctors who do general practice, and there are surgeons, and there are cardiologists, and so on. Then there are institutions which have something to do with medicine such as hospitals, which employ doctors but they also employ accountants and administrators. Every one who works in the medical industry is not a medical doctor.

I think confusing economists with financial people and accountants is like mixing up doctors, pharmacists, and hospital administrators. Some economists work for banks and financial institutions, and so on. But that is not all that economists do by a very long shot. Also, some study aggregate national-level statistics of course (employment rate, inflation, GDP) and that is what is reported in the popular press. Perhaps this can explain the popular misconception regarding what economists do.

So the question is what exactly do economists do. The short and trivial answer is economists do economics. And the circularity involved in defining economics as what economists do does not help at all. Paul Samuelson’s definition of economics in his famous textbook Economics is a good place to start understanding what economics is.

“Economics is the study of how people and society end up choosing, with or without the use of money, to employ scarce productive resources that could have alternative uses–to produce various commodities and distribute them for consumption, now or in the future, among various persons and groups in society. Economics analyzes the costs and the benefits of improving patterns of resource use.”

Studying people exercising choice is what makes economics a study of behavior. Behavior – both human and non-human – has to do with rewards and punishments, gains and losses, in other words incentives. To some, the broadest generalizations that a study of economics leads to are, first, incentives matter, and second, markets work. The rest of economics is an elaboration and detailed arguments about those two generalizations. Recalls to mind what Ernest Rutherford had said about physics: “All science is either physics or stamp collecting.” That is, physics is central and the other bits of science are just a collection of facts that are peripheral and mere detail that one should not be overly concerned with.

Economics is all about codified common sense. I think that is what draws me to economics: I like common sense and I am appalled at the lack of common sense I see around the world. Setting aside the question of why common sense is called such when it is so uncommon, one may ask why economics is difficult if what it concerns itself with is apparently so commonsensical. I think it is difficult because its simplicity is deceptive.

To most bright people, the lessons of economics appear obvious and trivially true. The mathematician Stanislaw Ulam once asked Samuelson if there was anything in economics that was both non-obvious and true. Samuelson took several years to arrive at the answer that it was the theory of “comparative advantage.” He said, “That it is logically true need not be argued before a mathematician; that is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.” [Reference]

I have argued that the most important concept that underlies the lessons of economics is the notion of “opportunity costs” and that that is a fundamental feature of the universe which follows from the nature of time. Using the notion of opportunity cost, you can even support the central idea of comparative advantage and consequently the idea that trade is beneficial and thus support the idea that markets work and incentives matter, and so on.

Among the social sciences, economics appears to have great explanatory power, and holds the analogous position as physics does among the hard sciences. Economics has an explanation of pretty much any social phenomena. Once you know to how to reason economically, it all becomes obvious.

By reasoning economically, I mean two different things. First, the parsimony of the explanation. That is, what are the least restrictive set of assumptions one can make and yet derive a system which has explanatory and predictive power. Second, the reasoning based on a sound understanding of the basic principles of economics.

There is a very good reason to study economics: so that we can understand why the system is the way it is, and what it ought to be. We call the former positive analysis and the latter normative. The “is-ought” gap can be bridged only if one understands the nature of the economics universe. Otherwise one can end up meddling in a system one does not fully comprehend and behave like the monkey who tried to save a fish from drowning by putting it up on a tree.

Gautama, the Buddha, had enunciated the general truth that suffering arises from ignorance. A particular instance of that principle is that the suffering arising from the present state of our economy arises from the ignorance of those who have so far directed it. And as long as ignorant monkeys rule, we the fish will be constantly in danger of being saved from drowning.

Related post: How to Study Economics.

Author: Atanu Dey

Economist.

9 thoughts on “Reasoning Economically”

  1. Hi Nu,

    This is a very nice piece. I liked it so much that I copied it and e-mailed it to myself. I have two editorial suggestions:

    1) Suggested title: “What Economists Do”

    – This is the exact point of the piece

    – It alludes to the title of one of my favorite books, “What Evolution Is”, by Ernst Mayr.

    2) The ending could be tightened up a bit.

    If you are interested, I could help you figure out where to publish this in the economics journal literature, which would involve sharing it with some of the renowned economists on the UCSD faculty where I work. I have nothing against blogs, but many economists who would appreciate this piece will never visit the blogosphere to read it.

    Cheers,

    Steve

    P.S. David Rose, who was my first mentor in economics, liked to rant about how economics was a discipline in which the average layman regards himself to be an expert, regardless of having never taken a course in the subject or having the slightest clue about what economics is or what economists do …

    I will send it to him as well if you give permission to do so.

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  3. I'm reminded of an SVSekar comedy where a garage mechanic comes to see a doctor. Suddenly the doctor gets an urgent phonecall. The doctor tells the mechanic - "just sit in my chair & watch my clinic, I'll be back real soon". The mechanic blurts out "But what is it that doctors do ?". But the doctor rushes out of the clinic, & the dumbfounded mechanic sits down gingerly on the doctor's chair.

    In a while, a patient comes in & says, "Doctor, my joints are aching".
    The "doctor"-mechanic thoughtfully replies, "Why don't you drink a can of motor oil ?"

    Jokes aside, this article is mostly preaching to the converted. Obviously economists will be delighted to know that they "do economics", just as schoolteachers "mould the character of the next generation", or lawyers "seek justice", or doctors "cure disease". These lofty goals obscure the actual specifics & clarify nothing.

    I'm reminded of that priceless scene in Roja where the villagers ask the groom what he does, & he says he is a cryptographer.

    But what is it you do? they persist.

    Suddenly one bright villager, obviously confusing cryptography with photography because they sound phonetically alike, declares "the groom takes pictures!", & the villagers are appeased. Atleast the groom is gainfully employed!

    Over a decade ago, our Professor got up & welcomed us, "the future electronic engineers of India", to the engg school.
    afaik, not a single one of my classmates is doing anything today remotely related to electron or engineering. though all of them without exception declared themselves "electronics engineer" on their wedding invitation!
    the majority of them work in software outfits. some went to B-school & serve as middle managers. and so on...

    again, no doctor ever cures disease. the drugs that do so are cooked in big pharma by chemists & molecular biologists & the like. the doctor simply asks you if you have health insurance. if you don't, he politely turns you away. if you do, he will put you on a drug regimen that he's been trained to do so in med school, and hope that your insurance covers the cost of said drugs.
    the schoolteacher is an overworked underpaid employee of the schoolsystem who makes sure kids absorb the texts in the syllabus well enough to not flunk out of the state boards. and we can all safely conclude that lawyers are sharks who have nothing to do with justice and everything to do with billing you $250 by the hour.

    Wittgenstein declared himself a philosopher, but pottered around in gardens to make ends meet. Another favorite philosopher Thoreau measured the lengths and widths of farms for a living. The DOL informs me that most mathematicinans work in the insurance business as actuaries...

    "observing people's behavior" is all fine, but i would doubt if that is a monetizable activity. most economists i know either teach economics/finance/B-school subject in some univ setting, or work for some financial outfit or investment bank or somesuch, where they go by the term "quant", & put out reports predicting the GDP or some consumer confidence index for the next quarter, based on which the firm places bets on the market.

    The economist John Kenneth Galbraith was taking a nap on a weekend, when he was put on a plane and taken away to a secret location, with strict instructions to his wife & family to keep mum on his absence. At the scret location ie. Camp David, JKG found himself in the presence of a dozen economists who were also similarly escorted away on their weekend. President Nixon confronted the bunch & said "price of meat is going thru the roof. what should i do ?"
    obviously, beefprice is a function of cattle supply and cattlefeed supply, which had been heavily hit by a drought in the south of usa.
    one could simply wait & hope the supply demand curves of beef reach some equilibrium, but the situation was dire & there was rioting in the public. Nixon hoped the economists would have an answer. JKG said "price controls!". So Nixon instituted a prize-freeze on beef for 90 days. Public was elated, Nixon's rating soared & all was well. 90 days later, the freeze was lifted. Economics prevailed, & the price of beef exploded. Poor Nixon repeated the gimmick with his economists & asked them "what should i do now ?" JKG wanted to say price-control again, but another economist pre-empted "you can't step into the same river twice". Nixon shot back "yes you can, if the river is frozen!"

    Now that's an example, albeit a lot moe dramatic, of what economists actually do...

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  5. although i am suppose to say about ur article here, I found ramblings by Krishnan more interesting. Its high that we as practitioners of sciences start understanding the basic tenets of our professions.
    Salil

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  6. Economics has an explanation of pretty much any social phenomena. Once you know to how to reason economically, it all becomes obvious.

    This works for substituting “religion,” “political science” and no doubt many other fields of study in place of “economics.” We have no shortage of explanations.

    Marvin Harris’ book, “Cows, Pigs, Wars, and Witches : The Riddles of Culture” does a nice job of weaving a few of our ‘ologies’ together. That was from Anthropology 101 in my case.

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