The Myth of the Rational Economist, II

A month ago, I posted a rather polemical review of a book called The Myth of the Rational Voter, by Byran Caplan, a libertarian economist from George Mason University. At the time, I had merely begun reading the book and it annoyed me so much that I felt the need to vent. I have gone back to the book and am determined to see it through to the end. In the meantime, I intend to continue posting more measured – yet critical – commentary of Caplan’s work. As the title suggests, the book argues that voters are irrational; or, to put it in Caplan’s terms, ‘rationally irrational’. As I mentioned in my previous post, Caplan introduces his fellow economists to the literature on crowd irrationality in order to challenge the foundational assumption of the economics profession:  that your average ‘lay person’ is a rational actor. Caplan’s thesis is that the general public is economically illiterate and suffers from a number of ‘systemic’ biases: anti-market bias, make-work bias, anti-foreign bias, and pessimistic bias. According to Caplan, the evidence suggests that those not versed in economics believe that protectionism is good; they believe that it is better to employ labour than to ‘save’ it through the implementation of labour-saving technology; they believe that immigrants steal their jobs and that multinational corporations ship jobs overseas to low wage labour markets; and they generally think that economic life is getting worse. As a side note, the book was published in 2007, so the last point may not be too far off the mark. A panegyric to neoliberal capitalism published at the very outset of the greatest economic crisis since the Great Depression tends to raise a number of questions regarding the expertise of the economist.

The evidence that Caplan uses to support his claims comes from the Survey of Americans and Economists on the Economy (SAEE), conducted by the Kaiser Family Foundation, the Washington Post and the Harvard University Survey Project in 1996. As its name suggests, the survey asks economists and noneconomist Americans the same questions regarding the economy. To begin with, one can raise some objections about relying on unhistorical survey data (that is, data collected from one year) to support the claim that the public’s ignorance about economic issues stems from the ‘rational irrationalism’ that is itself rooted in human psychology. After all, Caplan states in the introduction that these ‘systemic biases’ are not culturally specific, and, by implication, are not historically specific either. Yet, it would be interesting to see how the perceptions of the public and the economics profession on the economy have changed or remained constant over time.

Caplan is aware that critics will suggest that the evidence merely demonstrates that economists and ‘lay people’ have different conceptions of the economy but does not offer proof that it is the economists who are right and the lay people who are wrong. It could very well be that it is the economists who are wrong. It is indeed tempting to reach this latter conclusion when you have Caplan, in a discussion that characterizes interest on money lending as something ‘earned’, chiding ‘everyone from ancient Athens to modern Islamabad’ for their wrongheadedness in viewing usury as a form of unproductive, parasitic activity.

In order to meet this criticism, Caplan attempts to dispel what he considers to be two common objections. First is the ‘self-serving bias’. This argument suggests that economists provide overly optimistic forecasts of the economy in order to curry favour with powerful economic interests. Economists themselves tend to be members of the elite, and their intellectual work serves the interests of the class to which they belong. Caplan rightly points out that such an argument is incredibly reductionist, reducing economists to the status of class mercenaries. The second is the ‘ideological bias’. In the hands of Caplan, this is not as straightforward as it sounds. By ideology, Caplan is referring to the various ‘ideological’ traditions that often form the basis of partisan politics. More specifically, what Caplan is referring to here is the perception that economists suffer from what he calls a ‘conservative’ bias (conservative in the peculiar American sense of the term). By doing this, he can then make the comparison between conservative economists and conservative non-economists and show that in the face of divergence, it does not hold that economists have a conservative bias (or at least one that is relevant for their truth claims).

Caplan attempts to dismiss these claims of bias by engaging in what he considers to be a kind of ‘controlled’ experiment (although, this kind of control falls far short of the kinds of controls we see in experimental science due to the fact that Caplan is not ‘experimenting’; he is merely dealing with survey data). Caplan claims that we can ‘control’ for these biases and create what he calls an ‘enlightened public’ that is a hypothetical group that has the equivalent of economist credentials while all of their other characeristics – race, class, gender, ideology, income, etc. – remain ‘fixed’:

‘In the enlightened preference approach, one estimates what a person would think if you increased his level of political knowledge to the maximum level, keeping his other characteristics fixed. Using the SAEE, similarly, I estimate what a person would think if you turned him into a Ph.D. economist, keeping his other characteristics fixed.’

The result, according to Caplan, is that we can now have a reliable sense of what people from all demographic backgrounds would believe if they had a Ph. D. in economics (notice that Caplan bizarrely considers a person’s  ‘political knowledge’ to rise to the ‘maximum level’ when they have the credentials of a Ph.D. in economics). And this, he argues, is a viable ‘control’ for the ‘self-serving bias’ and the ‘ideological bias’ levelled at economists by critics:

‘One can use this information [the SAEE survey data] to estimate what the average belief would be after statistically adjusting for both self-serving and ideological biases. I term this the belief of the Enlightened Public. The Enlightened Public’s belief is the answer to the question, “What would the average person believe if he had a Ph.D in economics?” Or equivalently:  “What would Ph.D. economists believe if their finances and political ideology matched those of the average person?”

Now, this idea of being able to construct a hypothetical ‘enlightened public’ as a control that lends credibility to Caplan’s claim that economists are right about the economy while lay people are wrong, seems to me to be rather dubious. But even if we accept the idea of an ‘enlightened public’ that – because they hypothetically have Ph. D. economist credentials – agrees with economists, how does this demonstrate anything other than the fact that people who go into economics will tend to accept certain economic truisms propogated by the economics profession? Does it convincingly demonstrate that their knowledge is true? I remain unconvinced.

This takes us back to Caplan’s treatment of the ‘ideological bias’. Aside from the fact that Caplan adopts a severely narrow rendering of what ‘conservative’ means (for example, not all ‘conservatives’ support free market economics, even in the US), he also adopts a narrow understanding of what we can consider to be an ideological bias. When assessing economists, I think we should speak of a different kind of ‘ideological bias’, one that cannot be reduced to a partisan position. Rather, we should approach it as a disciplinary ideology based on an uncritical acceptance of the measures, presumptions and methods that obscure one’s view of reality. Back in the 1960s, Thomas Kuhn made the argument that the questions deemed worthy of asking in the scientific community are determined by the existence of scientific ‘paradigms’ that tend to frame intellectual activity. An example of this kind of ideological thinking is illustrated in a letter that was written to Queen Elizabeth by economists who were associated with the British Academy. Their response to her question: ‘Why didn’t any of you see the credit crunch coming?’ is quite instructive:

‘the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.’

This is the kind of ideological bias I would suggest many – perhaps even most – but not all economists suffer from. I think we would all be better served if more economists were more reflexive of the kinds of measures they use, and the kinds of assumptions upon which they build their models. Even in his most modest moment, Caplan expresses no such humility.

An example of the disciplinary ideology of economics can be found in certain kinds of uncritically accepted measures used in economic analysis. For example, most economists use GDP as a standard measure to assess the vitality of an economy. Positive GDP indicates economic ‘growth’ which is generally assessed as a sign of economic health, while a declining GDP, or worse, a negative GDP, indicates economic decline and recession, respectively. But some critical economists – the kind that are not included in Caplan’s consensual depiction of the economics profession – have questioned the usefulness of these kinds of measures for assessing the reality of economic prosperity. James K. Boyce from the Political Economy Research Institution at the University of Amherst in Massachusetts, argues that GDP is a misleading measurement for assessing the real state of an economy. In particular, it tends to ignore key indicators that measure the distribution of wealth in any economy, thereby making it difficult to assess how groups of people can be negatively affected even in times of economic growth. At the same time, it often includes certain economic developments that do not contribute to sustainable economic development, thereby giving us an exaggerated sense of economic vitality. Some of the countries with the highest GDP – like the US – also have the highest levels of income inequality. The widespread acceptance of measurements and indicators that fail to accurately assess economic wellbeing amongst economists is, I would argue, a better example of disciplinary ideology than the kind of partisan ideology that Caplan easily – and correctly – refutes.

But there is perhaps an even more fundamental way in which economics tends towards ideology; and this is expressed in they way that economics dismisses the lived reality of the very people that constitute the economy that they tend to treat as an automous entity. Laymen and economists look at the ‘economy’ from different ‘subject positions’ and this influences their interpretations of economic ‘health’ and determines the way they answer the questions being asked in the survey that Caplan uses as his evidence. Not surprisingly, Caplan does not recognize this. He considers economics to be a relatively ‘uncontested’ scientific discipline and the economy to be an objective thing that exists independent of our experience and perception—another example of disciplinary ideological bias. Laymen, presumably of average education and credentials, will be looking at the economy from the perspective of employment opportunities that are realistically available to them; they will look at corporate profitability and executive pay in relationship to the average working class salary that is realistically attainable by them; they will be looking at the question regarding the offshoring of jobs in the context of the deindustrialization of the American economy. In other words, they will no doubt answer these questions both in relation to their own lived experience as well as the existence of the dominant narratives in popular discourse. Economists, on the other hand, view the economy from the perspective of aggregate data; data that is abstractedfrom the lived experience of the workers that constitute the real economy. For most economists, jobs are jobs; the disappearance of industrial jobs through labour saving technology and their replacement by high value added computer programming or design jobs that are only available with high degrees of certification is considered to be a sign of economic progress because they are notassessing the data in relationship to the lived experience of the workers who are displaced by labour saving technologies and who have no realistic chance of upgrading to the newly developed technological sectors. For the economist there are labour markets within which workers are free to move and exercise their free choice. For the layman, there are communities within which they are rooted; families, amenities, schools, hospitals, services, property values, etc. In other words, the concrete fabric of their lived experience that often makes it difficult to merely pick up and seize those opportunities in the labour market. For the economist, the closing of an auto-factory can – in theory – be compensated for – at the aggregate level – by an influx of high-value added computer jobs, somewhere in ‘the economy’. For the worker, the closing of an auto-factor means unemployment, the loss of health insurance, the closure of the local pub, a decline in property values, the flight of services like local banking, and the decline of spillover industries that made the community a vibrant economy.

Caplan’s conclusion, of course, is that economists should have more power in determining economic policy free from the intervention of democracy. In light of the crisis of 2007 to the present, this seems to me to be yet another example of the ignorance and arrogance exuding from dominant sectors of the economics profession.

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