Thursday, December 15, 2005

Economists should stick to economics

A growing trend in economics is economists extending their analysis to social issues. I’d like to look at two quite different manifestations of this trend and suggest that economists should steer clear of using economic theory to look at non-economic issues.

1. Applying economic methods

The first manifestation of this trend is applying statistical methods developed in economics to examine social trends. An example of this is examining empirically whether the death penalty might contribute to lower murder rates in an area.

This isn’t really economic analysis in any sense – it’s just taking statistical methods that happen to have been developed for economic analysis and using them in sociological analysis. And this is an area in which economists can make a positive contribution – more and reliable data always helps us make more informed decisions.

(A caveat is that you should be very wary in listening to economists discuss the moral implications of their findings. For example, in the death penalty article above, the authors reckon that each execution for a murder leads to about 18 fewer murders and therefore suggest we are morally required to execute murderers. We should think very carefully before taking that conclusion at face value, even if we could believe the data (which are suspect)).

2. Applying economic theory

Much more problematic for me is when economists start applying economic theory or models of economic behaviour to social situations.

A classic example is the economics of marriage, surprisingly well-trodden ground which tends to produce studies that are dazzling both for the sophistication of their mathematical models and the simplistic stupidity of the assumptions about human behaviour on which they’re based.

You can pick up the flavour from this one, about marriage causing the gender wage gap:

Although economic considerations are not always deciding factors when men and women fall in love, they do play an important role in the decision to marry, according to Elul and Volij, assistant professor of economics.

Men… begin saving their earnings in hopes of attracting a wife. "If the men do not save enough they will not have much to offer," said Volij.

In the model, if a woman is proposed to by a suitable man living in the same city, she will certainly accept the proposal. But if a woman is proposed to by a man living in a different city that is not as advantageous to her earning potential as the one in which she lives, she faces a dilemma: She could marry, move and earn less, or she could reject the offer. "Her choice will depend on the terms of the husband's offer (that is, his savings) as well as other factors like wages and interest rates," the authors wrote. In most cases, the model shows that women will accept the offer of marriage if the savings of the men are significant. As a result, women often sacrifice their earnings by following their husbands, leading to a gender wage gap.

In the paper, individuals are utility maximizers, choosing to marry when it is in their self-interest.

Women are assumed to control the bargaining and hence:

they are going to be able to extract more benefits of marriage for themselves. As a result, the women feel less pressure to work. In fact, they are able to work for lesser pay and yet extract better benefits since they are in control of the bargaining...

So this model brilliantly explains the gender gap – as long as you assume a myriad of things that are unproven and go against everything common sense tells you to be the case: women choose husbands according to their savings and the general level of wages and interest rates, everyone enters marriage to extract an economic benefit (economists generally and rather old-fashionedly assume this to be the man’s income for women and the woman’s labour for men).

The problem with all these sort of analyses is that they take as their starting point standard assumptions which are necessary for basic supply and demand models to work – most notably that everyone acts in their own self-interest. These assumptions are pretty reasonable when you’re looking at consumer behaviour in supermarkets or how firms price goods or choose suppliers or make investment decisions. They’re completely wrong when you’re looking at social behaviour.

Amazingly enough, most husbands don’t want to spend all their money enjoying the good life so they can leave their widows destitute. In fact, any empirical economic study shows that many wealthy older people live relatively frugally so they can leave money to their families. Husbands and wives in functional relationships don’t try to extract the maximum economic benefit from the other: their relationship is about providing love and support to the other.

Economists first assumption is that people are rational. Yet they abandon this assumption as soon as they look at social behaviour. Entering relationships solely from the point of view of what you can get out of them would leave you a miserable and lonely person. And that’s just not rational.


Veggie Friendly said...

Interesting article. Both Andy and I have tried to persuade each other to be the sole income provider, but to no avail.

I think an area where economics is relevant to marriage (or de facto long term relationships) is buying a house. I'd like to know if the fact that people are getting married later, or not finding a partner at all, is affecting people's capacity to buy a house, because obviously it is harder when you only have one income, not two.

I remember reading a while ago that some people were choosing not to get married because of their shaky economic postiion (i.e. men felt they had to have more money before they could attract a partner, or people felt they needed some savings behind them before they could get married).

I wonder what role perceptions of economic status plays in how attractive people think they are. Like, do some men assume that they are less attractive if they have less savings? Maybe one for the psychologists and their statistices.

Beth said...

Hey Davo, so excited to see your blog. Very thoughtful and interesting posts, too. This one was especially great.

I try not to make any life decision based on money - it just tends to cloud the other factors which usually have a greater impact on my happiness. Like, you can justify being miserable if it's economically rational. Or you can be happy :-) I suppose that's a bit of a short-term view though!

Anyway, keep up the writing.

David Jeffery said...

Thanks Beth!

There's a growing body of literature on the economics and psychology of happiness. It's interesting stuff. I'll try and write something on it soon.

Anonymous said...

I see your point, but be careful about what you consider a social issue for economists to steer clear of. Aren't clean air, clean water, clean soil, and other commodities not valued in the marketplace soical issues? If contingent valuation is a lousy way to price environmental goods, should we steer clear?

David Jeffery said...

You're right. I guess I'd see the allocation, valuation, etc of environmental commodities by society as something to which economics could make a valuable contribution while I'd see the allocation of 'resources' within a relationship or family as something where we should take economic analysis with a very large grain of salt.

The difference I think is in the assumptions on which the particular analysis relies - particularly the assumption that individuals act purely in their own self-interest. On a society-wide scale this assumption may approximate reality but as the community which you're analysing gets smaller, pure self-interest is increasingly challenged by notions of duty, reciprocity, kindness and love. By the time an analysis drills down to the family level, assumptions of pure self-interest are just ludicrous.

I'm still not sure about contingent valuation - thanks for raising that because it's a good example of something that is probably right on the cusp. Will have a think about that one!