I have the refrain to “Fight of the Century” stuck in my head again. “Which way should we choose? More bottom up or more top down?” I’m sure you’ve seen a lot of commentary on this video. Great job, Russ and John. I just wanted to point to a tiny slice of the lyrics, which I noticed while watching the video with my students this past semester. At 2:14, Keynes retorts to Hayek’s argument that stimulus spending doesn’t necessarily shorten the cycle. Note Hayek’s response in turn.
KEYNES: Are you kidding? my cure works perfectly fine. Have a look, the great recession ended back in ’09. Surely, I deserve credit. Things would have been worse. All the estimates prove it—I’ll quote chapter and verse!
HAYEK: Econometricians, they’re ever so pious. Are they doing real science or confirming their bias?
This is interesting because it points to the incentives of economists themselves. Last time I checked, earning a Ph.D. in economics doesn’t mean you get whacked into a spell of unwavering pursuit of the public interest. You have prior beliefs that select you into certain fields and methodologies (the count of spontaneous order econometricians is low). Once you’re trained in those areas and develop expertise, your human capital becomes locked in and your own economic welfare is tied to how highly regarded those areas are in the profession. Each year when the Nobel prize in economics is awarded, complaints and criticisms are flung by economists working in competing areas or with different methodologies, not from economists working in the Laureate’s own field.
So take note. When a so-called expert with “Ph.D. in Economics” after their name says we should do this or that with taxpayer money, he might have a lot at stake personally in the type of advice he gives.
Wayne’s and my dissertation advisor, Bob Tollison, shows from a slightly different angle how economists’ incentives affect their work. In his 1985 Southern Economic Association presidential address, for example, Bob states his maxim.
The economist cannot take a measure of the world without obeying its postulates… The economist is a rational, maximizing individual, subject to the predictions of economic science.
In the paper, Bob artfully looks at the biographies of several luminaries (Smith, Marshall, Wicksell, Keynes), especially their most creative work. In each case, these luminaries were most productive when their immediate environment created low costs of innovation. Chapter 3 of Madmen conveys Bob’s results:
For example, the Victorian economist Alfred Marshall invented the concept known as price elasticity of demand—a brilliant stroke of creative genius—while on an extended convalescent vacation on the coast in southern Italy. The cost of creative production is low while sunning oneself on the roof at Palermo. On the other hand, Adam Smith all but quit writing once he took on the responsibilities as Commissioner of the Scottish customs office, just two years after publishing The Wealth of Nations. The immediate lesson is that time constraints matter.
In economics we think about the relationships between means and ends, and how individuals choose actions that pursue their own rational self interest. That holds for consumers and firms, and since the emergence of economic imperialism in the late 1950s, we have seen how it also holds for voters, politicians, lawyers, clergy, families, interest groups, political parties, and more. Who is to say it doesn’t also hold for economists?
Now, of course, I am an economist. So my advice should be suspect too. But here’s the thing. I don’t make a habit of giving policymakers advice on how to spend taxpayer money. Instead, my general message to policymakers is: Before introducing new carrots, try rolling back old sticks. Alas, no politician I’ve ever met seems to carry that message.
Bottom line: Incentives matter for economists, too. So watch out.