2019 Nobel Prize in Economics: A Reading List

Today (25.11.2019), TINT is organizing a little event about the 2019 Nobel Prize in Economics (see the poster below). For those who are unable to attend, I prepared a quick reading list that contains some articles about the 2019 Prize as well as some critical perspectives about the work of Nobel Laureates. Of course, this is not an exhaustive literature list. Nevertheless, I hope it is useful.

newposter

First, the documents that you can find on the Nobel Prize website. They give a very good overview of the work of Abhijit Banerjee, Esther Duflo, and Michael Kremer:

Second, Esther Duflo’s Richard T. Elly Lecture is a must read:

You can also watch this.

And now, some critical perspectives:

Finally, some critical perspectives on RCTs and “poor economics”, published prior to the announcement of the 2019 Nobel Prize.

Of course there is more, but I hope this is useful for a start.

A summer reading list for students of Philosophy of Economics

I prepared this list for my Philosophy of Economics students (Erasmus School of Economics, Erasmus University Rotterdam). Most books in this list should be interesting even if you do not like philosophy of economics, but they are related to the topics we have discussed in class. Of course, they will be even more interesting if you put your philosopher of economics hat on. The list consists mostly of light books that you can read on the beach, in a hammock, on top of a mountain, or wherever you are fancying for the holiday. They are good books, nevertheless. I hope you will find this list useful and enjoy reading these books.

The reading list

The first group of books in the list is about economics, economists, and how models are used. The first book, Dani Rodrik’s Economics Rules gives a wonderful and easily digestible overview of how economics works. Rodrik is a prominent economist and in this book, he defends economics against criticism. However, he also criticises economists for misusing their models. Dani Rodrik’s overview closely relates to our discussion concerning models and explanation in economics. This is a very good book. The second book by Diane Coyle, The Soulful Science, gives an overview of what economists actually do. Although it is a bit outdated, its overview of research areas in economics is very useful—especially if you are considering pursuing a career that involves research. Roger Backhouse’s The Puzzle of Modern Economics paints a picture of economics as a powerful science by discussing how economic models are used by economists in practice. This is not a bestseller. In fact, many people do not know that this book exists, but it is a very good book.  The last book in the list also discusses how economic models are used in practice. Alvin Roth received the Nobel Prize in Economics in 2012. His book, Who Gets What—and Why, gives a highly readable and moderately enjoyable story of how economists design markets. The whole book about to the following question we discussed during the lectures: what are the conditions under which we can carry the lessons we learn from models to the real world?

Picture1 Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik
Picture2 The Soulful Science: What Economists Really Do and Why It Matters  by Diane Coyle
Picture3 The Puzzle of Modern Economics: Science or Ideology? by Roger E. Backhouse
Picture4 Who Gets What ― and Why: The New Economics of Matchmaking and Market Design by Alvin Roth

Next in our list are two books that are closely related to the several topics we have discussed in class. Both talk about the crowding-out effect of monetary incentives, touch on criticisms concerning rational choice and game theory, discuss several experiments, etc. Both books also discuss the moral and policy implications of economic models and the assumptions we employ. The Moral Economy requires a more careful reading. Thus, I suggest starting with The Why Axis.

Picture5 The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens by Samuel Bowles
Picture6 The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life by Uri Gneezy and John List

Now, a bunch of books on behavioural economics. I am sure that many of you have read some of these books, but I would like to mention them anyway. I think both Nudge and Misbehaving are very readable introductions to behavioural economics, so they are definitely recommended. If you did not read it already, read Daniel Kahneman’s Thinking, Fast and Slow this summer. It is a very good book. But if you’d like to read something lighter to begin with, consider Dan Ariely’s Predictably Rational. It is a fun book. In fact, although they are not in my list, consider reading Ariely’s other books too. While reading these books you will remember several topics from our philosophy of economics course, or at least many things should sound familiar :)

Picture7 Misbehaving: The Making of Behavioral Economics by Richard H. Thaler
Picture8 Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler  and Cass R. Sunstein
Picture9 Thinking, Fast and Slow  by Daniel Kahneman
Picture10 Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions by Dan Ariely

If you are up for some serious reading on philosophy of economics, the following books should satisfy your desire. The first book by Robert Sugden (The Community of Advantage) wonderfully combines almost everything we discussed during the semester: welfare economics, behavioral economics, normative analysis, invisible hand, incentives, theories of justice, moral limits of markets etc. It is a new book, and if you would like to catch up with recent debates among economists, this is the book to read. If you would like to make some heavy lifting in philosophy of economics then you should also read the book by Hausman et al. It is heavier than other books. So, it is definitely not for the sunbed.

Picture11 The Community of Advantage: A Behavioural Economist’s Defence of the Market  by Robert Sugden
Picture12 Economic Analysis, Moral Philosophy, and Public Policy (3rd Edition), by Daniel Hausman, Michael McPherson, and Debra Satz

If our discussion on the moral limits of markets was interesting, I suggest the following two books. They are easy to read, but also critical. Test your philosophical argumentation skills as economists against these books!

Picture13 What Money Can’t Buy: The Moral Limits of Markets by Michael J. Sandel
Picture14 Why Some Things Should Not Be for Sale: The Moral Limits of Markets  by Debra Satz

If you’d like to brush up your economics while critically thinking about economics, I suggest the following books. Economics in Two Lessons is fairly new. I did not finish reading it yet, but it looks like an excellent book. The other two books are also fun to read.

Note that the last book in the list is special. Thomas Schelling’s Micromotives and Macrobehavior is one of my all-time favorites. If you read it, you will be amazed by the clarity of Schelling’s thinking. Although it does not explain economic concepts like the other books, it is about how you can understand the world with very simple models. It is a must read for all economics students.

Picture15 Economics in Two Lessons: Why Markets Work So Well, and Why They Can Fail So Badly by John Quiggin
Picture16 Economics: The User’s Guide: A Pelican Introduction by Ha-Joon Chang
Picture17 Economics Without Illusions: Debunking the Myths of Modern Capitalism by Joseph Heath
Picture18 Micromotives and Macrobehavior by Thomas C. Schelling

As an economist, you need to know more about inequality, international trade, economic growth, and many other topics. Here are four books that I think will help you follow the debates concerning important topics. I would like to mention One Economics, Many Recipes separately because it is the most relevant from the perspective of philosophy of economics. It shows how to use models of economic growth in practice, paying close attention to economic methodology.

Picture19 Global Inequality: A New Approach for the Age of Globalization  by Branko Milanovic
Picture20 Straight Talk on Trade: Ideas for a Sane World Economy by Dani Rodrik
Picture21 One Economics, Many Recipes: Globalization, Institutions, and Economic Growth  by Dani Rodrik
Picture22 Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson

Finally, a book about writing. Read it to improve your writing.

Picture23 Economical Writing: Thirty-Five Rules for Clear and Persuasive Prose (3rd edition) by Deirdre N. McCloskey

I think this list should get you through summer, but if you want more look at this reading list. If you would like to do some more serious reading, there is a reading list at the end of our syllabus.

Have a nice summer.

Understanding with theoretical models

ABSTRACT. This paper discusses the epistemic import of highly abstract and simplified theoretical models using Thomas Schelling’s checkerboard model as an example. We argue that the epistemic contribution of theoretical models can be better understood in the context of a cluster of models relevant to the explanatory task at hand. The central claim of the paper is that theoretical models make better sense in the context of a menu of possible explanations. In order to justify this claim, we introduce a distinction between causal scenarios and causal mechanism schemes. These conceptual tools help us to articulate the basis for modelers’ intuitive confidence that their models make an important epistemic contribution. By focusing on the role of the menu of possible explanations in the evaluation of explanatory hypotheses, it is possible to understand how a causal mechanism scheme can improve our explanatory understanding even in cases where it does not describe the actual cause of a particular phenomenon.

KEYWORDS: models, explanation, causal mechanisms, segregation

JEL CODES: B40B41

Citation: Ylikoski, Petri & N. Emrah Aydinonat. 2014. “The Diversity of Models as a Means to Better Explanations in Economics.” Journal of Economic Methodology, 21 (1), 19-36. https://doi.org/10.1080/1350178X.2014.886470
Pre-print available at SSRN ResearchGate.

Philosophy of Economics – Syllabus

This semester I am teaching the Philosophy of Economics course at the Erasmus University Rotterdam to the students of Erasmus School of Economics. Here is the  Syllabus, which also includes a reading list. Comments and suggestions are welcome.

CFP: WHAT TO MAKE OF HIGHLY UNREALISTIC MODELS?

Call for Papers
WHAT TO MAKE OF HIGHLY UNREALISTIC MODELS?
Workshop
12-13 OCTOBER 2017
http://www.helsinki.fi/tint/models2017

TINT
Academy of Finland Centre of Excellence in the Philosophy of Social Sciences
University of Helsinki, Helsinki, Finland
http://www.helsinki.fi/tint

What to make of highly unrealistic models? This is one of the big questions in contemporary philosophy of science, especially in philosophy of economics and biology.

Two sets of issues are relevant to answering this question. The first has to do with the ways in which highly unrealistic models should be characterized and the numerous ways in which models can be unrealistic. The key concepts here include those of representation and target, truth and falsity, abstraction and isolation, idealization and simplification, etc. Recent literature on models exhibits conceptual and terminological diversity and disagreement in characterizing unrealistic models. Different authors use different names to refer to highly unrealistic models: ‘toy model’, ‘fictional model’, ‘minimal model’, ‘non-representative model’, ‘model without a target’, ‘substitute model’, etc. Moreover, they sometimes use the same name to refer to different types of models. Neither the precise meanings nor the relations between these notions are clear in the literature.

The second set of issues has to do with the functions and uses of such unrealistic models. What purposes can they serve, and what purposes are actually pursued when using them? The main body of literature points to representational quality as grounding explanatory capacity despite abstraction, isolation, simplification and idealization. Others dispute this idea. Moreover, highly unrealistic models can serve other possible functions, next to their explanatory uses. Debates concerning the appropriate uses of highly unrealistic models need some tidying up.

TINT will host a workshop in Helsinki on 12-13 October 2017 in order to sort out some of the ambiguities and confusions in the literature and to contribute to a better understanding of the interpretations and uses of highly abstract and idealizing models. We are particularly interested in papers that (i) clarify the meaning of commonly used terms such as toy model, minimal model, fictional model, substitute model, etc, and that (ii) clarify the arguments for and against such models having explanatory import or some other epistemic or non-epistemic function. Papers that focus on and compare highly unrealistic models in economics and biology are particularly welcome.

If you would like to join us please send an extended abstract (750 – 1000 words) before 15 August 2017 to N. Emrah Aydinonat (emrah.aydinonat@helsinki.fi). We plan to publish a selection of papers from the symposium as a journal’s special issue. For this reason, authors accepted for the workshop are required to submit an extended summary of their argument (2000 – 2500 words) before the event. Extended summaries will be distributed to all participants in advance. The workshop will consist of short presentations followed by extensive discussion.

Location: University of Helsinki, Helsinki, Finland
Date: 12-13 October 2017
Deadline for abstract submission:  15 August 2017
Announcement of accepted abstracts: 1 September 2017
Deadline for the extended summary: 1 October 2017

Organizers: N. Emrah Aydinonat, Till Grüne-Yanoff and Uskali Mäki


 

A review of James Kwak’s Economism

Economism
Economism, James Kwak, Pantheon, 2017

I just finished reading James Kwak’s Economism: Bad Economics and the Rise of Inequality. Here is a quick review of the book.[1]

Imagine a first-year economics student. After attending six lectures in introductory economics, and carefully studying the first six chapters of his economics textbook, s/he gets comfortable with the basic supply-demand model. Bedazzled by the potential uses of this simple model and explanatory power of economics in general (looking at the covers of economics made fun books convinces her/him about this), s/he starts thinking that the supply-demand model is the only thing that s/he needs to know. As a firm believer of market solutions to everything, s/he quits school in order to give it back to you, the people. S/he becomes a politician (or adviser, author, columnist, the president…) and starts applying what s/he learned from the textbook to real-world problems. Because s/he skipped all other courses, s/he does not have any idea about how to conduct research on these important societal problems. So s/he bases all of his policy decisions (or suggestions) on the basic supply-demand model and a little bit of armchair reasoning. James Kwak’s book, Economism, is a critique of this student’s abuse of basic economics.

More properly, Economism is a book on the dangers of applying simplistic economic models to complex real-world problems. According to Kwak, economism is the act of trying to explain all social phenomena and to solve all societal problems with basic economics.

“[Economism] rests on the premise that people, companies, and markets behave according to the abstract, two-dimensional illustrations of an Economics 101 textbook, even though assumptions behind these diagrams virtually never hold in the real world.” (Chp.1)

You might ask: But who does that? Is there really anyone out there who acts like a university dropout president (politician, adviser, author, columnist…)? Kwak’s book provides enough evidence to show that economism is a real problem. And if you think about it, you might find your own examples of economism. Think about those politicians, columnists, experts, and journalists who talk about taxes, minimum wages, regulation, inflation, healthcare etc. Think about how TV and radio programs, podcasts, blogposts, tweets, etc. help an oversimplified supply-demand logic to reproduce and invade people’s brains. And think about how easy it is for anyone to have an illusion of understanding economics. If you could Google it, you could think that you know it! Search for tax policy, drug policy, minimum wage policy, or any other thing you like. You’ll get a quick answer and a fix for your problem. Anyone who is willing to learn some economics but does not have the time to do it properly can be infected with economism quite quickly. So Kwak’s attempt to warn us concerning the dangers of economism is a valuable endeavor.

Of course, Kwak is not the first person to warn us against the abuse of basic economics. Noah Smith, for example, wrote about economism in 2016. He called it 101ism. See for example, Most of What You Learned in Econ 101 Is Wrong, and 101ism. And here is something from Paul Krugman:  101 Boosterism. Last year, Dani Rodrik also warned us against misuses of economic models in his Economics Rules. Also note that there is a huge literature in philosophy of economics that discusses the limits of idealized and abstract models in economics. Given this background one expects a lot from a book length treatment of economism, or 101ism.

My expectations were very high. This is probably why I am disappointed. I knew in advance that in the book Kwak would be discussing how economism misleads us concerning issues such as the minimum wage, tax policy, and financial regulation. So I expected a detailed and careful discussion of these topics. Something that would go beyond the blog posts and columns cited above. Moreover, I really wanted to learn about the origins of economism. I wanted to learn who to blame, and why. On top of this, there was a lot of buzz on my twitter feed which also raised my expectations. I did not expect Kwak to dive into philosophy of science, but I was expecting that he would have some serious discussion of the limits and merits of simple, abstract, idealized models. At least I was expecting Kwak to go beyond just reminding us that economic models are unrealistic, and that they employ simplifying assumptions.

Even though Kwak uses considerable amount of space and several supply and demand graphs to demonstrate the possible ways in which that Econ 101 models may mislead us, he does not show the reader how one should really think about the issues discussed in the book. His argument basically boils down to the following claim: Econ 101 thinking is erroneous because the world is more complex than the basic model, and the empirical evidence concerning the matter is mixed. For example, Kwak (in Chp. 9) summarizes economism’s claim concerning labor markets as follows: “The minimum wage causes unemployment and harms poor people”. And here is how he summarizes how things are in reality: “The minimum wage (around current levels) has little impact on unemployment and reduces poverty”.[2] Or, he summarizes economism’s claim concerning financial markets as follows: “People only buy financial products that are good for them”. And he argues that the more likely reality is “many people make poor choices about complex products such as Option ARMs”. Fair enough. But how should one avoid economism and think about these issues? Does Kwak have an answer to this question?

First note that Kwak does not argue that economics is useless or that economists should abandon their beloved simple models. He argues that

“The answer to economism is not to reject economics altogether. Rather, the immediate antidote to economism’s simplistic model of reality is more and better economic analysis, which can help identify the fundamental drivers of social phenomena or select the most effective solutions to difficulty problems” (Chp.9)

“Recognizing that economics does not provide a single simple answer to all questions is a crucial step in throwing off the blinders of economism” (Chp.9).

So Kwak seems to think that economic models help us understand the world. But he does not tell the reader how. The world is complex. All economic models are similar to the basic supply-demand model in that they simplify and employ unrealistic assumptions. Kwak does not help us in finding our way from simple models to more complex reality. If we would like to avoid economism, how should we approach the subject matter? What is the appropriate way to use economic models? Not clear! Kwak does not really attempt to answer these questions. We learn that we should be careful about the dangers of economism, and that is about it.

What about the origin and sources of economism? Kwak has a whole chapter on that. He makes some strong claims, such as the following:

“For a worldview like economism to take root and grow, it must serve a significant social group.” (Chp.3)

“[Economism] matters because it is one important vehicle that interests groups have used to pursue their objectives during the past half century.” (Chp.3)

“Economism exists because people organizations saw how they could use economic principles to their advantage.” (Chp.3)

“Today, economism reflects the preferences and interests of the very rich more than those of ordinary citizens” (Chp.9)

“The great achievement of economism has been to repackage a political ideology [market fundamentalism or neoliberalism] as a lightweight, easy-to-use, seemingly neutral framework for seeing the world.” (Chp.9)

Basic argument here is that economism benefits the wealthy, thus it must have been intentionally promoted by them. Unfortunately, Kwak does not provide enough evidence that these and other related claims concerning the origins of economism are right. The evidence he provides is basically about some connections between economists, institutions and people with money who funded some of these people and institutions. This lays down some of the connections, but it is not enough. Maybe it is impossible to provide a convincing account of the origin of economism in one chapter, but I was supposing that this was one of this book’s promises. So I was disappointed. To be fair, Kwak cites his resources. In order to get a better sense of the development of economism (especially in USA) one could read: The Idea Brokers (James Smith), The Power of Ideas (Lea Edwards), Building Chicago Economics (eds. Robert Van Horn, Philip Mirowski, and Thomas A. Stapleford), The Road from Mont Pèlerin: The Making of the Neoliberal Thought Collective (eds. Philip Mirowski and Dieter Plehwe), and other works cited by James Kwak.

After reading the book, we learn that economism is bad. Also, we are provided with a list of names and institutions[3] that we could blame. I’ll only mention the names of the economists that pop up: Ludwig von Mises, Friedrich von Hayek (Nobel Prize 1974), Milton Friedman (Nobel Prize 1976), Gary Becker (Nobel Prize 1992), George Stigler (Nobel Prize 1982), and Richard Posner. Unfortunately, Kwak does not discuss the actual contributions of these economists to research. I cannot help thinking that maybe Kwak also got trapped by the simplistic thinking that he criticizes. Remember, he wished to argue that real economics is not like simplistic Econ 101, and that actual research in economics is superior to simplistic Econ 101 thinking. Could it be that the actual contributions of these economists are much more sophisticated and important than they appear in Kwak’s book? Let me just remind you that the list contains four Nobel laureates.

So what is my verdict? I enjoyed reading the book. It introduces the reader to the debates about minimum wages, tax policy, health policy, and financial regulation. Also, the chapter on the origins of economism could be considered as a good first reading on the topic. Nevertheless, I was disappointed because I was expecting much more from the book. So I’ll recommend the book with just one warning: If you would like to have a better understanding of how economists think and how to avoid economism and all that, this book will not help you much. If you are going to read this book, also read Dani Rodrik’s Economics Rules (see my review here). Dani Rodrik provides a much more sophisticated (and accessible) account of economic models and guidelines for using them appropriately. You could also supplement this book with other popular books. For example, you could read Ha-Joon Chang’s Economics: The User’s Guide, which champions a pluralistic approach to economic issues.

If you are wondering about the remedy for economism, remember the economics student who got infected because s/he quit learning economics too early. The first and most important remedy for economism is to keep on studying economics. A good economics education will teach you that if you try to apply a model without taking into account the specifics of the particular real-world problem you are dealing with, you are very likely to misunderstand the problem and its solution. After all, a good Econ 101 is the best cure for 101ism. [4] Naturally, I would also add some philosophy of economics to the recipe.

Thank you for reading.

Notes:

[1] All references are to the e-book edition of the book (sold by Google Play Books)

[2] Also see: The Curse of Motivated Reasoning against Econ 101 by Ryan Bourne, James Kwak on Minimum Wage  by David Henderson, and James Kwak Sure Doesn’t Understand The Economics Of The Minimum Wage by Tim Wortstall.

[3] Kwak also list the following institutions: Volker Foundation, Mont Pelerin Society, Foundation for Economic Education (FEE), The American Enterprise Institute, The Heritage Foundation, The Cato Institute, and The Manhattan Institute. Moreover, Kwak points out that authors like Henry Hazlitt and Jude Wanniski helped the spread of economism.

[4] Kwak argues:

“Paying more attention to topics such as economic history, institutions, behavioral economics, common market failures such as asymmetric information, and empirical methods could help dilute the intellectual hegemony of the competitive market model.” (Chp.9)

But, students of economics learn about most of these topics. Also one of the first things that one learns in economics courses is that assumptions matter. True, there could be more emphasis on institutions, economic history, history of economics thought, and economic methodology. There is much room for improvement in economics education. But this does not justify the now widespread belief that economics education is harmful. I am almost sure that James Kwak would not agree with such a statement, but his book might contribute to this belief.


Some other reviews of Economism

Understanding Economic Models (Course)

Course code: FILM-353, Understanding Economic Models, 5 cr, University of Helsinki

Syllabus (fall 2016)

This is a course that will improve your understanding of economics, and broaden your horizon concerning what economists do. We will present you the necessary tools and tricks to tackle very difficult questions concerning the status of economics as a science. The course will cover many exemplary models and their use in theory and policy in order to improve your understanding of economics. We will also have heated debates. Really! After finishing this course, you will be able to defend your discipline better against criticism and skepticism. But also you will be able to criticize it better—just in case you would like to do that. We have one requirement: You should have successfully completed the introduction to economics course. Otherwise, all economics students from all levels are welcome. Students of other social sciences and philosophy who have a basic knowledge of economics are also welcome.

 

INSTRUCTORS

N. Emrah Aydinonat
Researcher at TINT
neaydinonat.com
@aydinonat
Michiru Nagatsu
Researcher at TINT
michirunagatsu.com
@michurin

 

Introduction

Students of economics sometimes complain about economics and economics education. They say things like the following:

Economics education and textbooks are so far away from the real world that I do not see how they can be useful in any meaningful sense. In fact, we are learning a lot of unrealistic models that have nothing to do with the real world. Real people are not like Homo Economicus; we are not as calculative, as selfish, and as weird as Homo Economicus. No one I know thinks at the margin. And thanks god, no one is maximizing utility. Of course, even if they want to do that, they do not know enough math. Also, you know, economic decision making is much more complex than choosing between apples and bananas. Monetary incentives do not always work. People are not rational, they are emotional. They do crazy things. Markets are not perfect. The invisible hand is an illusion. And do not get me started with the failure of economics before, during and after the 2007-8 crisis…

Students sometimes complain about economics. So what? Why should we care? Well, most importantly, learning economics is not only about memorizing the ten principles of economics and taking derivatives. Understanding economics requires a good understanding of the nature and scope of economic models. Our representative student above is challenged by some very fundamental questions about economics.

01

Consider the following seemingly simple questions. Can a scientific model which is obviously wrong explain anything? Can it help us understand the real world? If people are mostly irrational creatures when compared with Homo Economicus, can economic models help us understand how people behave? If markets are never perfect, can we trust the invisible hand? Before answering these questions, also consider Nobel Prize winner economist Paul Krugman’s comment on economics and economists. He said “the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” So according to Krugman, economists should not mistake their fancy models with truth. The question is, if this is true, what should they do with these fancy models?

02

In fact, it is not only our representative student or Krugman who criticizes economics. Heterodox economists and other social scientists also criticize economics for similar reasons. But not only that! Methodological debates concerning economics are abundant in the history of economics. Competing schools of economic thought disagree about the nature and scope of economics, and about the way in which economic research should be conducted. Mainstream economists also disagree about how economics should be. Moreover, now that we have research areas such as behavioral economics, experimental economics, and neuroeconomics (btw, are they different?), there is more disagreement concerning the assumptions that economists make and the models that they use to explain the world.

So, in brief, it is a mess out there! And that is why we have this course. We would like to bring some order to this mess by way of studying economic models with the help of some tools and tricks from philosophy of science. Yes, this is a course in philosophy of economics. But do not worry, we have a practical approach. We will talk about economics all the time and introduce the philosophical tools without you realizing it :)

03

The main aims of the present course are

  1. to provide the student with the tools and abilities that are necessary to discuss and understand debates concerning the status of economics as a science; and
  2. to give a broader view of different schools of economic thought with a special emphasis on new developments in economics.

The course covers fundamental issues in the philosophy and methodology of economics and discusses some of the different schools of thought in economics from a methodological perspective. The mainstream economics (which forms the core of economics education) is at the center of the course and other schools of thought are discussed in relation to this mainstream. Particularly, the course focuses on how alternative schools in economics criticize the mainstream. Defining common assumptions and concepts of mainstream economics (such as rationality, equilibrium, efficient markets) and their criticism will get special attention throughout the course.

If you are still reading this, we assume that you are taking this course. However, if you’d rather not take this wonderfully interesting course, let us give you the answer to all the questions we will ask during the semester. It is 42.

Warning!

Warning! Philosophy challenges complacency. It is hard to know what the truth is concerning hard questions like the ones we will be addressing this semester.

Dan Hausman’s syllabus for his Philosophy of Economics (Fall 2006) contains the above warning. Same applies to our course.

Expectations

Participation: The course will be interactive and students are expected to make the required readings  before  coming  to  the  class  and  to  join  the  discussion  throughout  the semester. Do not forget! There is a 10% participation bonus!

Attendance: Attendance is required in the sense that in exams you are responsible from the materials covered in lectures.

Response papers (RPs): At least one reading will be assigned for each class. Based on these readings you are required to write 10 response papers for this course. RPs will be submitted via Moodle before class. In the first week we will explain what a RP is. Briefly, it is a short (e.g., one-page) essay where you evaluate, criticize or amend the required reading. For example, you may consider answering some of the following questions for this task.

  • What question does the paper address? Is it important? Why?
  • What is the hypothesis or theoretical argument?
  • Is the argument convincing? Why or why not?
  • What are the weak and strong parts of the paper?
  • How does the paper relate to the other readings (or to your other courses)?

The response papers are worth 40% of your final grade. You need to send in your response papers on time. If you are late, there will be a penalty. Here is how it works. If you miss the deadline you’ll lose 25 points (out of a 100). If you miss the deadline, we will give you another chance to submit your response paper. If you also miss the second deadline, you will not be able to submit your response paper anymore.

Grading

  1. Response papers 40%
  2. Midterm 10%
    Taking the midterm exam is obligatory. If you do not take the midterm you cannot take the final exam.
  3. Final Exam 50%
  4. Participation Bonus: 10% of the final result (1+2+3).

Recommended Reading

9780393246414_300 Economics Rules
The Rights and Wrongs of the Dismal Science
Dani RodrikW.W. Norton, 2015
ISBN-10: 0393246418
ISBN-13: 978-0393246414

Weekly Plan

1 12.09 Vocational Guidance Counsellor

Why be an economist? Why not a lion tamer? What is wrong with economics education? What do critics say?

2 19.09 NEA The Funniest Joke in the World

Pop-Economics explains the global financial crisis! Well, maybe not! It turns out that pop-econ explains everything including the logic of life but not the crisis. Could a science that cannot answer its core questions explain the logic of life? In answering this question we will have go back to the definitions of economics and discuss economics imperialism.

3 26.09 NEA How to Irritate People Economists I

How? Tell them that their models are unrealistic and they cannot explain anything. How do economists defend their models against this type of criticism? In this part of the course we will discuss the marginalism debate in economics and discuss how economists rationalize their unrealistic assumptions.

4 03.10 NEA How to Build Certain Interesting Things I

For example, how to build a linear city with two sellers in order to explain the excessive sameness in markets (e.g., the fact that all jeans, serials, cars, toothpastes, etc. are similar, but not exactly the same). Our question is whether it is possible to give a true explanation with “false” (unrealistic) models.

5 10.10 NEA The Dirty Fork

How can a complaint about a dirty fork at a restaurant trigger a series of actions ending up with the restaurant manager stabbing himself in the stomach with the dirty fork? How could seemingly harmless neighborhood choices bring about total racial segregation in a city? Or how could individuals who are trying to get the best trade at the moment end up creating a generally accepted medium of exchange? Some unintended consequences are important for economics. This week we will study the wonders of the invisible hand.

6 17.10 MN How to Build Certain Interesting Things II

Economists can build perfect models of markets. But real markets are not perfect. So why not make real markets similar to our perfect model markets? This week we will study how economists construct real markets from abstract models.

24.10 EXAM
7 31.10 MN How to Irritate People Economists II

This week we will discuss the modern critics of the standard economic theory of choice. This is our introduction to behavioral economics.

8 07.11 MN How to Irritate People Behavioral Economists

Is behavioral economics really different from neoclassical economics? Is it just neoclassical economics in disguise? Let us discuss some discomforting comments concerning behavioral economics.

9 14.11 NEA The Dead Parrot

“We feel much like the customer in the pet shop, beating away at a dead parrot.” Rabin and Thaler (2001: 230)

What to do when the pet shop sells you a dead parrot and does not accept it that the parrot is dead? In 1898 Thorstein Veblen criticized economists for not accepting the fact that Homo Economicus is like a dead parrot. OK he did not say dead parrot. He said “He is not the seat of a process of living.” Our subject this week is institutional economists (including Veblen) and their criticism to economics. Asking questions like “why do firms exist?”, or “why everyone misunderstood the Coase theorem?” we will slowly make our way to the motto “institutions matter”!

10 21.11 NEA Nobody expects the Spanish Institutional Inquisition!

Once upon a time institutional economics was yet another heterodox school of thought in economics. Today almost all economists—even those working at the IMF and the World Bank—accept that institutions matter. How did this happen? This week, we will start from mainstream models of economic growth and explain how and why economists explain why nations fail with institutions.

11 28.11 MN Nudge, nudge

This is the story of behavioral economists going to Washington. Nudge, nudge! Wink, wink! Say no more! How did economists get interested in nudging people into doing things? They have built models, they have built markets, now some of them are trying to build better people and better societies. This week we will discuss why and how people defend nudging.

12 05.12 MN Seduced Milkmen

A seductive woman lures (nudges?) the milkman into entering her house, the milkman ends up in a room with other milkmen, some of whom are very old, including one who is a skeleton. Our questions this week are: How much nudging is too much? Should economists be allowed to manipulate people’s behavior? We will discuss nudge paternalism and its critics and alternatives.

13 12.12 Self Defense Against Fresh Fruit

How to defend economics against an attacker armed with fresh fruit?

19.12 EXAM

Weekly Plan & Reader

[*] indicates a required reading

12.09.2016 | Vocational Guidance Counsellor
(What is wrong with economics education?)

Introduction to the course. Please make sure that you have read the following article before coming to the lecture. (You do not need to write a response paper!)

  • [*] Vromen, Jack (2009) “Economics and philosophy: More than having fun and making fun”, inaugural speech at Erasmus University Rotterdam.

19.09.2016 | The Funniest Joke in the World
(Pop-Economics explains the global financial crisis)

  • [*] Krugman, Paul R. 2009. “How Did Economists Get It So Wrong?” The New York Times Magazine, September 2. http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html.
  • Robbins, Lionel (1945) “Chapter 1: The Subject Matter of Economics”, in An Essay on the Nature and Significance of Economics, London: MacMillan, pp. 1-23.
  • [*] Backhouse, R. E. & S. G. Medema (2009) “On the definition of economics”, Journal of Economic Perspectives, 23 (1): 221—33.

26.09.2016 | How to Irritate People Economists I
(Economists and Theır Assumptions)

  • [*] Hall, R. L. and C. J. Hitch (1939) “Price Theory and Business Behaviour”, Oxford Economic Papers, 2 (May): 12-45.
  • Vromen, Jack (1995) Economic Evolution: An Enquiry into the Foundations of New Institutional Economics, London: Routledge. Chapter 1
  • Friedman, M. (1953) “The Methodology of Positive Economics”, reprinted in Uskali Mäki (ed.) The Methodology of Positive Economics: Reflections on the Milton Friedman Legacy, Cambridge: Cambridge University Press, pp. 3-43.
  • Gibbard, A., & Varian, H. R. (1978). Economic Models. The Journal of Philosophy, 75(11), 664–677.

03.10.2016 | How to Build Certain Interesting Things I
(e.g., a linear city, a fictional market and a stable equilibrium)

  • [*] Reiss, Julian. (2012) “The Explanation Paradox.” Journal of Economic Methodology 19 (1): 43–62..
  • [*] Mäki, U. (2013). On a Paradox of Truth, or How Not to Obscure the Issue of Whether Explanatory Models Can Be True. Journal of Economic Methodology, 20(3), 268–279.
  • Rosenberg, A. (2001) “Why Philosophy of Science” in Philosophy of Science: A Contemporary Introduction, London: Routledge, Chapter 1
  • Little, D. (2005) “Philosophy of Economics” in Sarkar, S. & J. Pfeifer (eds) The Philosophy of Science: An Encyclopedia, London: Routledge.
  • Rosenberg, A. (2001) “Explanation, causation and laws” in Philosophy of Science: A Contemporary Introduction, London: Routledge, Chapter 2
  • Glennan, S. (2005) “Explanation” in Sarkar, S. & J. Pfeifer (eds) The Philosophy of Science: An Encyclopedia, London: Routledge.
  • Mäki, Uskali (1992), ‘On the method of isolation in economics’, in Uskali Mäki and C. Dilworth (eds.), Intelligibility in Science (Poznan Studies in the Philosophy of the Sciences and the Humanities, 26; Atlanta and Amsterdam: Rodopi), 319-54.

10.10.2016 | The Dirty Fork
(How things get out of control with the invisible hand)

  • Any introductory economics textbook on the invisible hand (Homework: before coming to the lecture prepare a summary of how the invisible hand is explained in an introductory textbook)
  • [*] Stiglitz, J. E. (1991). The invisible hand and modern welfare economics. NBER Working Paper.
  • Sugden, Robert (2000), ‘Credible Worlds: The Status of Theoretical Models in Economics’, Journal of Economic Methodology, 7 (1), 1 – 31.
  • Cartwright, Nancy (2009), ‘If no capacities then no credible worlds’, Erkenntnis, 70 (1), 45-58.

17.10.2016 | How to Build Certain Interesting Things II
(Constructing real markets from economic models)

  • [*] Guala, Francesco. (2007) “How to do things with experimental economics.” In  Donald MacKenzie, Fabian Muniesa, and Lucia Siu (eds) Do economists make markets?: 128-162.
  • Alexandrova, Anna. (2006) “Connecting Economic Models to the Real World: Game Theory and the FCC Spectrum Auctions.” Philosophy of the Social Sciences 36.2: 173-192.
  • Mirowski, Philip, and Edward Nik-Khah. (2007) “Performativity, and a problem in science studies, augmented with consideration of the FCC auctions.” In MacKenzie et al.

31.10.2016 | How to Irritate People Economists II
(Critics of standard economic theory of choice)

  • [*] Thaler, Richard H. (2000) “From Homo Economicus to Homo Sapiens”, Journal of Economic Perspectives, 14 (1): 133-141.
  • [*] Henrich, Joseph, Robert Boyd, Samuel Bowles, Colin Camerer, Ernst Fehr, Herbert Gintis, and Richard McElreath. (2001) “In search of homo economicus: behavioral experiments in 15 small-scale societies.” The American Economic Review 91(2): 73-78.
  • Ashraf, Nava, Colin F. Camerer, and George Loewenstein. “Adam Smith, behavioral economist.” The Journal of Economic Perspectives3 (2005): 131-145.
  • Henrich, Joseph, Steven J. Heine, and Ara Norenzayan (2010) “The weirdest people in the world?.” Behavioral and Brain Sciences2-3: 61-83.

07.11.2016| How to Irritate People Behavioral Economists
(Neoclassical economics in disguise?)

  • [*] Berg, Nathan, and Gerd Gigerenzer (2010) “As-if behavioral economics: Neoclassical economics in disguise?.” History of Economic Ideas: 133-165.
  • Ross, Don. (2014) “Psychological versus economic models of bounded rationality.”Journal of Economic Methodology 21.4: 411-427.

14.11.2016 | The Dead Parrot
(From the lightning calculator to ‘institutions matter’)

  • [*] Veblen, T. (1898). Why is Economics not an Evolutionary Science. The Quarterly Journal of Economics, 12(4), 373–397.
  • Coase, R. (1937). The Nature of the Firm. Economica, 4, 386–405.
  • Coase, R. H. (1960). The Problem of Social Cost. Journal of Law and Economics, 3, 1–44.

21.11.2016 | Nobody expects the Spanish Institutional Inquisition!
(Economists explain why nations fail)

  • [*] Olson Mancur (1996) “Big Bills Left on the Sidewalk: Why Some Nations are Rich, and Others Poor” Journal of Economic Perspectives, 10(2): 3—24.
  • World Economic Outlook, Growth and Institutions, April 2003, 3
  • Greif, Avner (2006) Institutions and the Path to the Modern Economy: Lessons from Medieval Trade, Cambridge: Cambridge University Pres (Chp. 1 & Chp. 2).
  • James A. R and D. Acemoglu (2013) Why Nations Fail, Crown Business. Chp. 1 & 2.

28.11.2016 | Nudge, nudge
(Behavioral economists go to Washington)

  • [*] Thaler, Richard H., and Cass R. Sunstein (2003) “Libertarian paternalism.” The American Economic Review2: 175-179.
  • Amir, On, et al. (2005) “Psychology, behavioral economics, and public policy.”Marketing Letters3-4: 443-454.
  • Chetty, Raj. (2015) “Behavioral economics and public policy: A pragmatic perspective.” The American Economic Review5: 1-33.

05.12.2016 | Seduced Milkmen
(Nudge and its critics/alternatives)

  • [*] Grüne-Yanoff, Till. (2012) “Old wine in new casks: libertarian paternalism still violates liberal principles.”Social Choice and Welfare4: 635-645.
  • Beaulier, Scott, and Bryan Caplan. (2007) “Behavioral economics and perverse effects of the welfare state.” Kyklos4: 485-507.
  • Bolton, Gary E., and Axel Ockenfels. (2012)”Behavioral economic engineering.” Journal of Economic Psychology3: 665-676.

12.12.2016 | Self Defense Against Fresh Fruit
(Defend economics against an attacker armed with fresh fruit)

  • [*] Rubinstein, Ariel. “A Sceptic’s Comment on the Study of Economics.” The Economic Journal, 510 (2006): C1-C9.
  • Frank, R.H., Gilovich, T.D.and Regan, D.T. (1996). ‘Do economists make bad citizens?’, Journal of Economic Perspectives, vol.10, pp. 187–92
  • Frey, B. S. and Meier, S.(2003). ‘Are political economists selfish and indoctrinated? Evidence from a natural experiment’, Economic Inquiry, vol. 41, pp.448–62.
  • Cipriani, Giam Pietro, Diego Lubian, and Angelo Zago. “Natural born economists?.” Journal of Economic Psychology3 (2009): 455-468.
  • Bauman, Yoram, and Elaina Rose. “Selection or indoctrination: Why do economics students donate less than the rest?.” Journal of Economic Behavior & Organization3 (2011): 318-327.
  • Hummel, Katrin, Dieter Pfaff, and Katja Rost. “Does Economics and Business Education Wash Away Moral Judgment Competence?.” Journal of Business Ethics (2016): 1-19.