Ostrich Economics
posted by Frank Pasquale
Greg Mankiw believes he has revealed an obvious flaw in Robert Frank’s account of “relative deprivation” (which I’ve praised here.) According to Mankiw,
Market prices should reflect the externalities imposed by neighbors. . . . [C]onventional wisdom is that houses surrounded by bigger, more expensive homes sell for more, other things equal, than houses surrounded by smaller dwellings. This suggests that the rich convey positive, not negative, externalities.
Two responses:
1) Maybe people are sacrificing a lot to be among the rich–but many are not exactly comfortable with their relative position:
When chief executives are routinely paid tens of millions of dollars a year and a hedge fund manager can collect $1 billion annually, those with a few million dollars often see their accumulated wealth as puny, a reflection of their modest status in the new Gilded Age, when hundreds of thousands of people have accumulated much vaster fortunes.
Of course, I laughed at one Silicon Valley mini-mogul’s “earnest” assurance that “You’re nobody here at $10 million.” That kind of subjective “discomfort” is not something anyone should be lamenting. But there is a deeper problem with Mankiw’s drive-by dismissal of Frank’s argument–an extreme version of methodological individualism.
2. One of the key chapters of Frank’s Falling Behind is entitled “Smart for One, Dumb For All.” There he discusses an anecdote about evolution relevant to today’s competitions for status and wealth:
In the contests for access to mates, it’s the relative size of an animal’s antlers that counts, not how big
they are in absolute terms. But when fleeing from predators in densely wooded areas, greater absolute antler width is a serious handicap. It might seem that this is a problem that would solve itself, since a mutant elk with smaller antlers would enjoy relative immunity from predators. True enough, but such an animal also wouldn’t leave any offspring, and in the Darwinian contest, that’s the only payoff that counts.
Oversized antlers belong to a class of traits and behaviors that I have described as smart for one, dumb for all. They are a simple consequence of a positional arms race.
Mankiw’s methodological individualism appears to blind him to the ways in which a given decision can be eminently rational for a family (and those in its immediate vicinity) and yet be part of a process that is collectively self-destructive. Frank does take individual motivations as his starting point, but he follows this wise advice of James S. Coleman (in Foundations of Social Theory):
The interaction among individuals is seen to result in emergent phenomena at the system level, that is, phenomena that were neither intended nor predicted by the individuals. Furthermore, there is no implication that for a given purpose an explanation must be taken all the way to the individual level to be satisfactory. . . . [We] require an explanation that goes below the level of the system as a whole, but not necessarily one grounded in individual actions and orientations.
For Robert Frank, the key variation on classic economic methodology is realizing the importance of context to decisions: your perception of your house’s (car’s, tv’s, etc) adequacy depends on how well it compares to those in your reference group. Rather than contradicting Frank’s point, Mankiw’s insistence on the “positive externalities” of the rich reinforces it: because people generally realize it, they compete all the harder for residences in the “good” neighborhoods and flee the “bad” ones.
Like Frank, I am puzzled by how “the reigning economic models of consumer behavior . . . ignore context completely[, assuming ] that each person’s consumption spending is completely independent of the spending of others.” Frank predicts that:
Future intellectual historians will find this more puzzling than the fact that physicians once prescribed leeches to treat fever. Eighteenth-century doctors, after all, had no way of knowing about the germ theory of disease. But ignorance cannot explain the absence of context from economic models. Even those economists who have not studied the relevant social science literature surely know from their own experience how much context matters. [emphasis added]
So why the struthious approach to context? I’ll make a few stabs at solving that puzzle:
1) Consider that institutions like Harvard (where Mankiw teaches) are themselves great beneficiaries of rising inequality. They are engaged in a positional arms race for donor gifts, and have outdistanced the “pack” to an extent that suggests the general inequality of wealth in the U.S. As Steve O. Michael notes,
[I]n the past 10 years, donors have parted with vast sums of money in donations to colleges and universities that truly do not need them. When a university is richer than several countries put together, when a university can comfortably live off the returns on its billions of dollars in endowment, and when a university can no longer convincingly demonstrate how new money will make a concrete difference in the academic experience of faculty members and students, additional donations to the university are not only mindless but outright wasteful.
In a world of lower income inequality, we might see such gifts spread around among a wider group of almas matres.
On the other hand, it’s a stretch to call the Harvard faculty as a whole fans of inequality. And even if the economics department is pretty orthodox, it still has some members who’d easily recognize the wisdom of Frank’s approach.
2) A sociologist of knowledge might then conclude that the problem isn’t Harvard…so might it be economics in general? In The Black Swan: The Impact of the Highly Improbable, polymath Nassim Taleb argues:
Economic is the most insular of fields; it is the one that quotes least from outside itself! Economics is perhaps the subject that currently has the highest number of philistine scholars–scholarship without erudition and natural curiosity can close your mind and lead to the fragmentation of the disciplines. (155-56).
But I don’t think there is some disciplinarily monolithic “economics” one can dismiss so easily. The changing face of economics evidences an openness to influences from evolutionary biology, computer science, psychology, and philosophy. Mankiw himself recognizes the value of the “big questions.”
3) So that leaves another possibility: is there a political reason for Mankiw’s rather careless dismissal of Frank’s work? Well, Mankiw was an advisor to the current president. And here’s Frank’s account of Bush policies:
[The] George W. Bush administration . . . has enacted the largest ever cuts in our income taxes, most of it targeted to families with the highest earnings. Facing enormous federal budget deficits at a time when we are not paying teachers enough, not repairing our roads, bridges, and municipal water supply systems, and not inspecting the meat we eat, can multi-trillion-dollar tax cuts really be a sensible policy?
At a time when top earners have been reaping virtually all the fruits of the nation’s economic growth, can targeting more than 50 percent of the benefits of these tax cuts to the top 5 percent of earners really be a sensible step?
My guess is that Mankiw says: absolutely yes.
Photo Credit: Creative Commons Licensed Ostrich Image.
August 5, 2007 at 4:03 pm
Posted in: Economic Analysis of Law
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Responses (9)
Chris Vickers - August 5, 2007 at 6:09 pm
I think somewhat missed Mankiw’s main point here. The problem with the Gross review is that he makes a claim about people’s stated preference in surveys that is (apparently) in conflict with actual, revealed preference behavior. Now, that conflict doesn’t necessarily undermine (or support) Robert Frank’s hypothesis. I haven’t read his book, so I couldn’t really say. But if what Mankiw says about real estate proces is true, than that is worth pointing out as a weakness, even if the conclusion Mankiw drew doesn’t follow.
And, as a further matter, I must say I’m not impressed with this post. Points (1) and (3) are arguments about character and motives rather than about data or logic, and (2) is an argument from authority, of sorts (though I wouldn’t call Taleb an authority in economics!) Maybe Mankiw’s not right here, but that’s pretty weak as a logical counterargument, at least in the eyes of this close-minded economist.
Chris Vickers - August 5, 2007 at 6:32 pm
Addendum, because the above sounds harsher than I intended: I realize that you made other points above, which were more substantive than the last three. I don’t have anything to say about those, as they are rather far from my expertise and interests. But I do think that it is neither necessary or prudent to look for biased motives for methodology; arguments and data speak for themselves.
Daniel Goldberg - August 5, 2007 at 8:57 pm
I don’t have much of an opinion on Mankiw’s take, but Charles Taylor is smiling and nodding his head in concurrence with your attack on methodological individualism, which I think is one of the most perilous points of departure for many economic theories. I like his theory of irreducibly social goods (like health care, perhaps?), and I especially like his use of Wittgensteinian conceptions of meaning (i.e., no private language) as a way of grounding his objections.
Moreover, I take issue with Chris’s claim that “arguments and data speak for themselves.” As philosophers of science like Kuhn, Feyerabend, and Keller have been arguing for decades, arguments and data most assuredly do not speak for themselves, but fundamentally require interpretation. If arguments and data spoke for themselves, one might wonder why, as Victor Fuchs (former President of AEA) noted in 1998, economists agree on little of importance regarding health care. I suppose one could attribute such widespread disagreement to the lack of any conclusions being “spoken” by the arguments and data, but I think it reveals that interpretations about the same data can and frequently are considerably divergent.
As such, I’m not sure I understand why arguments about character and motives are ever irrelevant in understanding why one takes a particular interpretive commitment. Of course, by themselves such points cannot establish the invalidity of an argument, but neither are they irrelevant, IMO.
Chris Vickers - August 5, 2007 at 9:44 pm
As philosophers of science like Kuhn, Feyerabend, and Keller have been arguing for decades, arguments and data most assuredly do not speak for themselves, but fundamentally require interpretation.
Well, I would say that the interpretation is part of the argument, so I’m not so sure I actually disagree with that. But as far as the Victor Fuchs example, to me that shows that health care is (like most important economic debates) fundamentally complex and thus it’s difficult to draw firm conclusions. To me, that’s not the same thing as throwing up our hands and declaring that truthseeking is fundamentally doomed, but I should say that I’m neither a philosopher of science nor a lawyer (rather a graduate student in economics), so I’m out of my element as far as those authors are concerned.
For an economist, though, it’s fundamentally weird to consider the background characteristics of someone making an argument about a question like housing prices. If I were to argue against a point made by, say Paul Krugman or Gary Becker, I wouldn’t try to dredge up their political leanings or their class background. Instead I’d look at their assumptions and the logic of their arguments. Maybe that’s hopelessly naive, but I don’t see how a scholar who is fundamentally concerned with truth can do differently. I’d like to think I’ve been reading Prof. Pasquale’s (excellent!) posts on Robert Frank’s book without discounting his arguments because he has previously expressed egalitarian beliefs. To do so is, I would argue, to betray a responsibility as a scholar.
I’m not sure I understand why arguments about character and motives are ever irrelevant in understanding why one takes a particular interpretive commitment.
They might explain why someone takes an interpretive commitment, but they can’t express whether or not a position is true. Consider the question, “Does raising the minimum wage affect unemployment?” That’s a factual question, though very diffcult to answer definitvely. For the sake of argument, suppose the consensus answer was “Yes, raising the minimum wage increases unemployment.” Then we could have an argument over whether the costs exceed the benefits, morality of the living wage, etc., and there I can see how motives would matter. But the factual question is just that, factual, and if the scholars are approaching the question openly, I fail to see what’s gained by venturing into motives.
I’ll let you all have the final word here, and simply point out that to me (and I would suspect, to most economists) the first part of this post, concerning Mankiw’s arguments, resonates far more than the latter, concerning Mankiw’s motives. Maybe that’s just a cross-discipline difference that cannot be bridged. (Also, I’d reiterate how much I’ve enjoyed the posts about Robert Frank from Prof. Pasquale. But I do object to arguments from motives, and will continue to do so.)
Daniel Goldberg - August 5, 2007 at 11:14 pm
Chris,
I don’t see how it follows from the claim that we are interpretive beings and that interpretation is always required — such that there is no view from nowhere in which arguments and data exist unconstrained by interpretation — means that “truth-seeking is fundamentally doomed.”
The view-from-nowhere is generally, though not universally discredited in a variety of disciplines, and I seriously doubt that the scholars who repudiate it are uninterested in truth-seeking.
If I were to argue against a point made by, say Paul Krugman or Gary Becker, I wouldn’t try to dredge up their political leanings or their class background. Instead I’d look at their assumptions and the logic of their arguments.
As I indicated, surely the argument does not rise or fall on those background motivations, but neither does it mean such motivations are irrelevant. Wittgenstein argued that background is essential for any kind of meaning whatsoever, and more than a few current philosophers of mind argue that background is actually essential for consciousness (most notably Searle).
But what’s more, it is absolutely the case that Paul Krugman’s political predilections illumine his arguments, that they color his interpretation. How could they not? To say this is not to contend that the best way of critiquing his arguments, if one were disposed to do so, would be to attack his motives, but you made a strong claim that his motives are basically irrelevant to his arguments. And I simply disagree with that view.
Do you really believe that Justice Scalia or Justice Ginsburg’s political views do not color their interpretations of the Constitution? I don’t.
I tend to think that failing to take account of the notion that scholarship is fundamentally a human endeavor, and a practice, and therefore consists of subjects drawing interpretations about everything, is not necessarily the most fruitful avenue for scholarship.
But the factual question is just that, factual
Facts are never just facts. Hume famously attacked this position, and philosophers of both language and science have continually pointed out that facts are value-laden. They come preconceptualized, pre-interpreted.
I suspect our fundamental disagreement comes down to the nature of interpretation, and the utility and merit of the view-from-nowhere position, but this discussion has been helpful in reminding me how some social scientists (not singling you out, here, Chris) strive to adhere to a model of science and understanding that, IMO, has been fundamentally undermined by a generation of humanist scholars.
In any case, thanks for the discussion.
Frank - August 6, 2007 at 12:43 am
I’ve learned a lot from the debate in the comments here, and I will try to respond in more detail later. For now, I will say that
1) I’m partial to Daniel’s point about the inextricable intertwinement of facts and values.
2) I’d take this in a slightly Geertzian direction: that the role of the social scientist may be, not a) to provide a version of reality we can all share, but b) to sharpen our sense of just how fundamental our differences our. For those purposes, it’s helpful to point out the disciplinary blinders and “deformations professionelles” any writer labors under.
3) I think that Mankiw’s work is ideological, but I think virtually any serious public intellectual has to be somewhat ideological; that is, has to be motivated by a vision of what a good society ought to look like and what human flourishing consists in.
It’s easy to caricature ideology; as Geertz observed in his essay Ideology as a Cultural System, it’s gotten quite a bad name over time:
“Edward Shils sketches a portrait of “the ideological outlook,” . . . [which] consists, most centrally, of ‘the assumption that politics should be conducted from the standpoint of a coherent, comprehensive set of beliefes which must override every other consideration.’ Like the politics it supports, it is dualistic, opposing the pure “we” to the evil “they,” proclaiming that he who is not with me is against me. It is alienative in that it distrusts, attacks, and works to undermine established political institutions. It is doctrinaire in that it claims complete and exclusive possession of political truth and abhors compromise. It is totalistic in that it aims to order the whole of social and cultural life in the image of its Ideals, futuristic in that it works toward a utopian culmination of history in which such an ordering will be realized. It is, in short, not the sort of prose any good bourgeois gentleman (or even any good democrat) is likely to admit to speaking.”
But ultimately, social science has to be ready check ideological ambitions even if it is in part motivated by them:
“Ideologies do make empirical claims about the condition and direction of society, which it is the business of science (and, where scientific knowledge is lacking, common sense) to assess. The social function of science vis-a-vis ideologies is first to understand them –what they are, how they work, what gives rise to them–and second, to criticize them, to force them to come to terms with (but not necessarily to surrender to) reality.”
My effort here is not to launch an ad hominem attack, but just to interrogate why a respected and intelligent social scientist would so casually dismiss the work of another person in his discipline.
4) Though I am not totally on-board with Deirdre McCloskey’s project in The Rhetoric of Economics, I do believe that a blog, journalism, and academic articles are to some extent rhetorical. As Aristotle observed in his work on rhetoric, “A speech consists of three things: the speaker, the subject which is treated in the speech, and the hearer to whom the speech is addressed (Rhet. I.3, 1358a37ff.)”. (from http://plato.stanford.edu/entries/aristotle-rhetoric/)
So the effectiveness of rhetoric is always going to depend on the character of the speaker. If someone is greatly benefiting from a system characterized by pervasive and easily remediable inequality, we might want to treat their defense of the system with extra skepticism.
Quoi? - August 6, 2007 at 1:14 pm
To what “easily remediable inequality” are you referring?
I’ve read many scholars concerned about inequality as such, and I think you must be the first to imply that there’s a quick fix.
Frank - August 6, 2007 at 4:48 pm
Quoi, you’re right, I should have said “ameliorable” rather than “remediable.”
By the way, the piece on Dubai and UAE in the NYT today is a fascinating look at extreme inequality.
Roszikansz - September 9, 2009 at 7:13 pm
Ostriches don’t bury ther heads in the sand; stop ignorantly spreading false ideas
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