http://www.econ.tuwien.ac.at/Lotto/papers/Kahneman1.pdf

is an interesting summary of Kahneman’s view of economics. It’s wel worth reading and quite short, too 🙂

CPW is right here in saying that rationality is true by default as it is a tautology. People make decisions that maximise their utiltiy – therefore people maximise their utility which is rational. Such a claim is empirically unfalsifiable – but also empirically worthless.

The point of it is too frame a problem – given the problem we can then apply value judgments and see if this holds empirically. However, if the data rejects the model is is rejecting the value judgments not the underlying premise that people are rational.

But to farm an answer out to Tim Harford:

Harford’s new book is overwhelmingly about one concept: rationality. He offers a simple and attractive definition: rational people will make decisions based on the costs and benefits of a specific choice, the effect on their total budget, and the future consequences of their actions. But he is quick to warn us of the usual simplifying assumptions made by economists. First, people are motivated by all sorts of emotions: “I do not suggest that people are wholly self-interested or obsessed with money.” Second, he acknowledges that people are not “blessed with the omniscience or perfect self-control” often assumed in economic models: “I do not deny that humans have irrational quirks and foibles.” Finally, he rejects the idea that economic agents are constantly calculating supercomputers that consider every possible outcome: “When we act rationally, we often do it unconsciously, just as when someone throws a ball for us to catch, we aren’t conscious of our brain solving differential equations to work out where it’s going to land.”

Having said all that, the rationality assumption leads to lots of testable models, many of which have been quite successful at explaining sociological phenomena. I’m thinking of Gary Becker‘s work in particular.

The link between fiscal policy and unemployment is much loved by many in politics, left and right. Politicians in general are keen to claim credit for lowering unemployment (or anything else that’s popular and usually have economic rationalisations for why it’s their fault. Except John Key, of course, who would rather claim credit for raising unemployment, lowering wages and increasing disadvantage. Why, I don’t know, but hopefully the Nats will keep him on.

I can buy all that, except:

“the idea that fiscal and monetary policies don’t have any impact on long-run unemployment”

Most of us would agree, but don’t forget about Hysterisis 😉 :

http://en.wikipedia.org/wiki/Hysterisis

“The confusion in the general public about when economists are doing economics or making normative statements tends to make them dis-trust everything we say.”

I think that this is a plausible explanation. The WSJ op-ed page has a lot to answer for. But I think there is a lot of shooting the messenger that goes on. A lot of economic criticism comes from people who simply don’t like the results that consensus economics spits out. Example: the idea that fiscal and monetary policies don’t have any impact on long-run unemployment is about as close to an objective truth as economics gets, but it’s a concept that a lot of lefty types clearly hate. If the economic consensus was still advocating Keynesian type policies, would these same people criticize economics to the same extent?

And a lot of criticism seems directed purely at the methodology: people are rational, respond to incentives, systems move to equilibrium. I don’t see greater objectivity helping here. No matter how objective you try to be, some people are still going to claim that the methodology is intrinsically bound with value judgments.

Thats one of the issues – it is incredibly difficult for us to say anything without making some value judgment. God damn in.

However, the value judgment about who is best placed at making value judgments relating to policy is different to the value judgments relating to policy, unless we have enough information to map the judgment on who makes policy onto the value judgments on policy. If we had this much information we would not need to rely on other agents to help us, we could just make up the value judgments ourselves.

However, I do realise that I am making a value judgment – and I do not expect us to all agree on this specific point, as you say we can’t objectively determine who is the best at creating policy related value judgments.

To re-iterate, I am not criticising economics – I am trying to defend economists from the claim that our focus on production is too narrow. If we state that economists are merely performing the role that they have a comparative advantage in, realising that this then needs to be combined with the work of other experts – then this criticism of economics seems unfounded.

As you say, this is awfully circular: we can’t know who’s best at making them without making one. Yet, if we’re not best, can we accurately make a value judgment about who is best? It makes my head hurt; I’m going to go and do some equations on the whiteboard and then maybe the world will make sense again 🙂

True true, which is why I generally stay away from the normative side – its too smart for me.

“how is it possible to meaningfully say that one person makes them better than another”

I don’t know. But isn’t that what a bunch of other social sciences focus on. Public policy definitely focuses on the normative issues of distributive and social justice and as a result must have some ability at defining cardinal rankings.

All I’m saying is that the normative side of policy creation requires value judgments etc. I tend to believe that individuals who have been trained to understand value judgments are likely to do a better job at it than economists – in the same way that I believe the economic method provides a better way of framing problems.

As you said, this is a value judgment by me – I have made a value judgment that other disciplines are better at making value judgments then economists ;). There is definitely no objective criteria to support this supposition – however, a value judgment is necessary in this case to define who should be determining policy.