Economist Judgment

Weak tall-tax support among economists suggests to me this question:

How much does economic theory influence economists’ policy recommendations?

Or more precisely:

Considering all policy judgments of all economists (made as economists, thinking economic theory relevant), what fraction of judgement variance is explained by the fact that they know a common economic theory (including frameworks, default assumptions, and standard data sources)?

I asked (a version of) this question at lunch yesterday.  Tyler C. suggested about 15%, while Bryan C. thought the number could be much higher for some average of economist judgments.  (Alex T. and I withheld judgment.)  Low estimates suggest economic theory usually says little, or that we are usually unwilling to give it much weight relative to our considerations (legitimate or illegitimate). 

I know of two relevant studies.  In one study, economist (and physician) policy choices had no relation to their beliefs on health economics facts.  Similar results were found for labor policy.  This raises two more questions:

Which economists rely more on economic theory, relative to other considerations, for their judgments?

For example, are libertarians better able to judge economic theory implications because libertarians explicitly reject such implications as a basis for policy?  Also:

For good policy advice, what is the best weight to place on economic theory, versus (individual or cultural) intuitive judgment?

My guess is over 75% weight, so I try to mostly just straightforwardly apply economic theory, adding little personal or cultural judgment.   Which is why I endorsed the tall tax.  What weights are other economists shooting for?

Added: That lunch seems to have also inspired Alex’s post today.

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  • http://michaelkenny.blogspot.com Mike Kenny

    Hm, maybe other economists are more likely to try to suggest a middle ground between dominant economic theory and what your average person might think acceptible, or average politician.

    I think of the law and economics movement versus pragmatic adjudication. As I understand it, law and economics seeks to bring about the best outcome in legal judgments according to economics. Pragmatic adjudication according to Richard Posner seeks ‘reasonableness’ in the legal sense rather than what economics might say is the best outcome, pragmatism being perhaps a bit more practical than the law and economics ideal.

  • Ben Jones

    So basically, what weighting do you give to rationality and what weighting do you give to bias? I’m not saying intuition is necessarily bias, but if (rational, well-thought-out) theory says one thing and economists decide to do something else, I hope they have a better reason than the ‘it’s silly’ cited in the original article.

    Can someone put a percentage on the degree to which the Tall Tax proposal paper is seriously advocating policy change, as opposed to pointing up the fallacy of current policy? 20%? 100%? 0%?

  • http://hanson.gmu.edu Robin Hanson

    Ben, Mankiw proposed the tall tax as a reductio of economic theory; he did not advocate it.

    Mike, the question is whether more “reasonable” policies are ultimately better or worse according to the standard economic criteria.

  • brian

    Q: What is the best weight to place on economic theory, versus (individual or cultural) intuitive judgment??”
    A: 100% logic and 0% bias.

    The question seems ridiculous to me. If the logic of an argument is sound, why should we reject it because it sounds “silly?” Since what sounds silly is often simply that which has not been implemented, isn’t relying on intuitive judgment simply status-quo bias? Further, the concept of “silliness” is incredibly subjective. The concept that the minimum wage could hurt the poor may sound silly, but that does not mean the idea is wrong or that we should reject it.

    I agree with Ben: intuitive judgment is simply bias, and should not be given weight at all on deciding what is the best policy for society.

    Now if we introduce pragmatic constraints, as Mike suggests, then “reasonable” policies may be a second-best option, since the first-best “silly” policy cannot practically get passed. Still, the silly policy is ultimately better, but it just has no realistic chance of getting passed.

  • http://michaelkenny.blogspot.com Mike Kenny

    Robin, I think the point of reasonableness as a standard is that one looks at the best option, asks if it’s acceptable to your average person, and if it’s not, you seek the next best option until you find the best ‘reasonable’ option.

    The assumption is perhaps that if the policy is going to offend your average person, it probably won’t survive. Presumably a ‘reasonable’ economic policy created by economists is better than an economic policy crafted by non-economists, or a good economic policy that people won’t accept.

  • http://michaelkenny.blogspot.com Mike Kenny

    Yes Brian, I think that’s the flavor of the reasonableness standard. Posner’s a judge and has to be concerned about practice as well as theory. If he went on what was economically best, he might be getting reversed by the Supreme Court a lot or instigating politicians to step in and create new laws to effectively counter the offending judgments he made.

    Side note: the way I suggest in the previous post a reasonable judgment would be found doesn’t necessarily have to be the only way to find it, or the way Posner would suggest it be done. It was just an example of how you might go about finding the best reasonable option.

  • conchis

    “If the logic of an argument is sound, why should we reject it because it sounds ‘silly?'”

    Two points:

    (1) Intuition is always part of assessing the soundness of an argument (as opposed to it’s validity, which is simply a matter of logic). The point of the height-tax paper is precisely that the theory isn’t sound. MW argue that the theory is valid (i.e. the conclusions follow from the premises) but that, because the conclusion is in their view implausible, the premises must be false. The thing is, even if you disagree with them, you’re still relying on intuitions – it’s just that your intuitions favour the premises of the theory rather than the conclusion that the height tax is false. You’re deceiving yourself if you think that this boils down to you being logical and they aren’t. In fact, the key issue is not just how much how much weight to give to intuition over theory, but how much to give to different intuitions.

    I tend to be more inclined to go with the sort of general intuitions that motivate the theory rather than the specific intuitions that we have about results in particular cases. But sometimes the specific intuitions will suggest that I haven’t adequately considered the general intuition that I thought I held. I think my practice would probably suggest something in the order of 80%-20% general-over-specific, but that’s an outcome of specific reasoning in each case, rather than an attempt to fit a distribution that I think should apply generally.

    (2) Even assuming we think the premises of an argument are true, our judgements about their logical validity aren’t infallible, and the law of unintended consequences suggests that it’s reasonable to be less than 100% certain about things that on-their-face appear logically sound. The key issue here is to what degree “intuition” or the “status quo” contribute useful additional information, but I would argue that that degree is not typically zero (particularly given that we typically have more information about the status quo than the alternatives to it). My gut is probably pretty similar to Robin’s on this, but, that’s probably because I’ve anchored to Robin’s estimate and can’t think of good reasons to depart from it. I’d prefer to have some evidence to base this on.

  • George Weinberg

    There are at least some economists that assert that economists shouldn’t make policy recommendations as such, they should just say what they think the likely results of proposed policies will be.

  • Mason

    Does this undermine Caplan’s “go with the experts” idea? Or is it an example of disagreeing on the margin? Seems like a margin with little disagreement and the consensus in the wrong direction.

  • michael vassar

    Conchis seems correct to me. George Weinberg too.

    It seems to me that economists and policy makers are asking significantly different questions. Economists are asking what policy is good in general, policy makers are asking what is good in a particular time and place, with a particular set of citizens, elites, customs, etc.

  • Alan Gunn

    There are different kinds of theories. Some of them–Newton’s laws, for instance–predict real-world outcomes. If one of these theories has proved useful, it would be foolish to disregard it, at all, so the right answer is “100% theory.” Nobody says things like “I know the theory says the apple’s going to fall on my head, but just this one time I have a feeling it will soar off into the sky.” “Theories” about what kinds of taxation are fairest aren’t like that, though. They’re mostly just a way of summing up intuitions about results one likes, so when this kind of theory is in question, the fact that it generates a result one isn’t comfortable with really is a reason for questioning the theory. To be sure, it is also a reason for questioning one’s discomfort with the particular result. Maybe your intuitions about results are inconsistent, and so ought to be rethought. So I don’t think any one percentage figure is “right” for dealing with this kind of question.

  • Cyan

    Some discussion of the tall tax idea is also going on at Andrew Gelman’s blog. (link)

  • http://hanson.gmu.edu Robin Hanson

    George, most economists make many policy recommendations.

    Michael, most economists talk often about particular situations.

    Alan, one can almost always argue reasonably that an estimate should vary with the situation. But you should at least be able to offer your guess for what that estimate will be averaged over situations.

  • mobile

    Mankiw’s tall tax, to the extent that anyone actually advocates it, is a normative consequence of the descriptive theory of tax incidence. If Mankiw’s proposal seems “silly” to me, then maybe all it means is that I don’t believe that revenue maximization and distortionary behavior minimization is the be-all end-all of tax policy (nor for that matter, I presume, does Mankiw believe that). I don’t doubt that Mankiw’s policy would do everything that he claims it would, but that’s not a sufficient reason for anyone to endorse it, even without making any personal or cultural judgements.

  • http://www.satisfice.com/blog James Bach

    Please distinguish theorizing from consulting.

    A recommendation to a client is an act of consulting.

    I have no background as an economist, but an extensive background in consulting. It’s not a question of intuition vs. reason. But rather a question of what problem my client would like help with, and what sort of help they will value.

    Outside of the oxygen-depleted confines of certain economic theories, the tall tax is simply absurd. Giving absurd advice will not win the favor of your client.

  • Colin Reid

    James:

    You say ‘It’s not a question of intuition vs. reason’, but your argument against the tall tax is pretty much just an appeal to intuition or common sense (which you seem to be metaphorically equating with oxygen).

    If you’re just making an argument against *advocating* the tall tax, this is a point that Robin made in the original tax-the-tall post. Experts may feel the need to bias their findings towards ‘common sense’ so as not to look ‘silly’ in front of others, especially those who don’t have time to take in the arguments behind the ‘absurd’ idea (which in the case of economic proposals would include a whole course on basic economic theory). But we should be aware that this is a bias, unless you consider common sense opinions on a statement to be overwhelming evidence of its truth or otherwise. At best, you could regard it as the experts telling white lies in order to steer people closer to an optimal position, because they estimate that this will work better than telling people straight out where they think the optimum lies. At worst, the experts actually believe their common-sense-adjusted position and are unaware of the bias.

    (Incidentally, there are two senses of ‘absurd’. One is a logical absurdity, in which one concludes both a statement and its negation. If you can show a theory leads to this kind of absurdity, then you can conclude the theory is false. A ‘fuzzy logic’ version of this would be to find that conditioning on statement A would cause statement B, a statement which has been previously assigned very low probability, to jump to a much higher probability, something which counts as evidence against statement A, though a Bayesian might then say statement A is ‘implausible’ rather than absurd. The other is common-sense absurdity, which means something most people would intuitively reject out of hand, or a priori assign effectively zero probability to. In the second sense, much of modern physics is absurd, for instance, at least from the perspective of someone who isn’t familiar with it. It’s the ambiguity between these meanings that gives the word ‘absurd’ its rhetorical strength.)

  • http://www.scheule.blogspot.com Scott Scheule

    This is my comment from Cowen’s response to this post:

    I’m not entirely sure what Robin is arguing.

    For good policy advice, what is the best weight to place on economic theory, versus (individual or cultural) intuitive judgment?

    My guess is over 75% weight, so I try to mostly just straightforwardly apply economic theory, adding little personal or cultural judgment.

    Good policy advice is presumably a function of two things: values and facts. If we lack the proper values, it doesn’t matter how good our facts are. And if we lack the proper facts, it doesn’t matter how good our values are.

    Economic theory attempts to answer the question “How do people respond to incentives?” That’s a factual matter. If this is all Robin intends by economic theory, then I’m inclined to agree we should give little weight to our personal or cultural judgment. But if that’s the case, I assume that what Robin means by personal judgment is our own anecdotal experiences, and I distrust those because people tend to overweigh the anecdote.

    For example, I think this is flimsy: “I know people who would stop working if the income tax rate was raised even one percentage point, therefore the entire economy would stall if taxes were raised.”

    Whereas this is stronger: “I’ve read many studies on large samples of the population on the disincentive effects of the income tax, and conclude raising taxes has minimal impact on taxpayers’ amount of labor.”

    (Note neither statement says whether or not we should alter tax rates.)

    Not only do I think the latter statement is stronger, I think the latter is properly described as being more unbiased than the former.

    If this interpretation of Robin’s stance is proper, than Tyler’s argument is either wrong or uninteresting. If Tyler in saying “Theories are always applied and interpreted through our personal and cultural filters and there is no other way it can be” means that no matter how we try, we will always have some residual bias leftover, then that’s true, but trivial. We will always have bias, yes, but we can both do things to reduce and increase that bias—we can move towards or away from an Archimedean point, even if we can never completely reach it.

    On the other hand, if Tyler means that there is no such thing as objectivity or no way to lessen our bias, then his point seems intuitively wrong. A postmodernist might accept that assertion, but if any other wants to, he’ll have to also accept much of the more disconcerting aspects of the postmodernist paradigm and its alarming stress on subjectivity.

    But, perhaps what Robin is speaking of is not so much the empirics of economics but rather the value of economic efficiency. Perhaps he means efficiency should weigh 75% and other values, presumably personal or cultural, should get 25%.

    If that’s so, there’s no reason I’m aware of for that weighting. And if that’s so, perhaps Tyler’s criticism is simply that all values are either personal or cultural—that there is no objective point to stand on and judge morality. I disagree—I think—but the issue is very contentious and I can understand Tyler’s position.