Wednesday, February 13, 2008

The Difference Between Economists and Non Economists

Economists have a certain world view. Their economic training gives a different insight into issues that non economists might not appreciate or consider important. These are few examples of different approaches to economic issues. There are other examples of differences and perhaps these differences are not as significant as we might imagine; I would be interested in hearing the view of both economists and non economists (assuming of course a 'noneconomist' would read an economics blog..)

Rational / Irrational

Economic theory assumes people are rational and will make rational choices. Yet in the real world people often make decisions which can only be viewed as irrational from an economic perspective. E.g. Why would people choose to take out pay day loans at an interest of greater than 2,000% apr? Why would people pay more for a product that is identical to another cheaper product? This is perhaps a big difference, but also highlights a limitation of economics. This limitation is examined in behavioral economics

Opportunity Cost

When watching a political debate or the views of voters, it always strikes me how little people consider the idea of opportunity cost. You can frequently here people say 'The government should save this hospital' 'The Government should provide more public transport' 'The government should reduce that tax'. However it is very rare that a pressure group or non economist will offer a way of funding the spending or tax cut; people often forget the opportunity cost of any economic decision.

e.g. how often do you here voters of politicians argue 'The government should increase spending on public transport; and this can be funded by imposing a political unpopular tax on cars. Furthermore, this tax is likely to overcome external costs and improve social efficiency.'
For an economist any decision on the governments budget imposes an unavoidable opportunity cost. Increase spending will lead to either higher tax or more borrowing. Non economists often forget the opportunity cost of economic choices.

Statistics vs Personal recollections

Non economists tend to put a greater emphasis on personal experiences and every day events. For example, many in the US feel the economy is already in recession because of the bad news on housing markets, subprime crisis and perhaps a personal experience of someone losing a job. An economist would be wary of giving importance to one off factors because they can give an inaccurate reflection of the overall picture.

Exaggeration

The media often seek to exaggerate the 'housing crisis' and 'rocketing' price levels. For example, in the UK, newspaper headlines have recently focused on 'The biggest house price fall for 15 months' This sounds more impressive than another headline, which is perhaps more accurate . 'Monthly house price figures show annual rate of House price inflation falls from 6.5% to 5.3%' Both headlines are correct in some way; but arguably the first headline emphasises a certain aspect of the statistics for greater 'shock value'. Of course, this is not to say economists can't use statistics for exaggerated effect; I'm sure readers could give numerous examples. But, perhaps non-economists are more likely to use misleading statistics, especially in the media and political world.

Certainty vs Uncertainty

The joke goes, put 10 economists in a room and you get 11 different answers. If you are wondering where the actual punch line is, don't worry - it's not that funny. But, the point here is that economists are trained to see both sides of the argument. For every statement a good economist will feel obligated to add numerous caveats and other potential outcomes. A recession might occur, but it depends on X,Y,Z. A non economist is more likely to see issues in black and white. The economy is messed up - We're heading for a recession.

Externalities

On the issue of imposing taxes on negative externalities, economists will justify tax and subsidies based on the issue of externalities. For example, an economist would say a congestion tax is justified because it internalises the external cost of driving into a city centre. Externality arguments can often be difficult to explain to non economists. If you mention a congestion charge to an average voter, there instinctive reaction would be 'not another tax on the motorist' 'this tax is unfair on low income groups'. This is not to say non economists cannot think in terms of externalities, but generally this is a low priority or doesn't immediately spring to mind

I got the inspiration to write this post after reading:

See also:

14 comments:

Jeremy said...

I found this post to be very engaging and insightful. Economists definitely seem to rely more on facts, rather than perceptions. As a person who deals with both politics and economics, I find it very useful to seek out the opinions of economists on certain matters; however, their recommendations are not usually popular in the political arena. The challenge is finding a way to marry good economic policy with acceptable political policies, which is a very difficult goal to achieve.

Tejvan Pettinger said...

Thanks for the feedback Jeremy. I agree that in the political sphere there is often a kneejerk rejection of certain policies that would benefit society.

Tejvan

mark vincent said...

So true. No matter what your political alliance, an economist will never say simply "its the presidents fault". Economists realize that macroeconomics is much larger than one person. Presidents get too much credit of good times, too much blame for downturn. Non economists will have no clue as to the cyclical nature of the economy.

Great emphasis on opportunity cost as well. The typical political "we need more this that and this (oh and dont forget change)" never speaks to the tradeoff of increasing xy and z.

Great site I am glad I found it.

MV

Tejvan Pettinger said...

Thanks Mark!

Anonymous said...

I( know this is an economics blog, but economists aren't the only people capable of rational thought. Perhaps the title should more reflect the divide between those who are trained in critical thinking and those who are not.

Tejvan Pettinger said...

good point anonymous. Of course, economists are quite capable of irrational thought as well.

docjmd said...

WHAT CONSTITUTES "ECONOMICS"?


My name is Jeffrey M Doyle. I ATTENDED THE UNIVERSITY OF MICHIGAN, ANN ARBOR AND MICHIGAN STATE UNIVERSITY, RECEIVING MY Ph.D. IN 1977.THE TITLE OF MY STLL RELEVANT DISSERTATION WAS: “ AN ECONOMIC ANALYSIS OF INTERFUEL COMPETITION”

FOR OVER THIRTY YEARS MY [AND OTHERS] IDEAS WERE DISMISSED AS UNPROVEN AND NOT RELEVANT. TODAY MOST
OF WHAT I PROPOSED IN MY 1977 PH.D. DISSERTATION HAS NOT ONLY GAINED ACCEPTANCE BUT IS BEING ACTIVELY
PROMOTED AND PUT INTO PRACTICE. BETTER LATE THAN NEVER.

Economics is not physics. The behaviour of human beings is not nearly as predictable as matter in physics [be it sub-atomic or macro.] While I understand the desire of many Economists to regard their Discipline as a deterministic, mathematically precise science, the reality is [with notable exceptions conceded] it is not a mechanistically elegant discipline like physics.

INTERDISCIPLINARY UTILIZATION AND INTEGRATION OF PHYSICS, BIOLOGY AND ESPECIALLY THERMODYNAMICS
INTO ECONOMIC ANALYSES, WILL GREATLY ENHANCE OUR ABILITY TO ADDRESS AND SOLVE CURRENT SOCIAL PROBLEMS--ESPECIALLY IN THE THE AREAS OF OF ENERGY AND ECOSYSTEM STABILITY

Anonymous said...

"rational" is debatable. If your choice is to take an outrageous payday loan or not fix your child's emergency dental problem - or either take the payday loan or not fix your car, lose transportation to your job and as a result lose the income and possibly get fired... it seems more rational to bite the bullet and take the loan. Utilizing an option that most would find undesirable does not mean that the person is irrational. It may instead mean that they were simply choosing it over an even more undesirable option.

I am proud of the analytical thinking skills that economics has given me, but your blog sounds a little overbearing and condescending to noneconomists.

Philipp said...

From what I know about both political and economic thought, you underestimate the depth of both. Part of sociopolitical analysis and politics in general rely heavily on the sophisticated use of statistics as a way to get to the truth of things (just think of the mathematics of polling forecasts during the presidential race). It is not just economists who focus on the big picture. Plus, that big statistical picture is in both camps not necessarily closer to the truth than the everyday observations you claim 'non-economists' supposedly base their arguments on. In fact, statistics are often deceptive, and sometimes deliberately used to mislead. In economic circles this is a recognized fact, especially in behavioural economics. Here, the focus is rather on the psychological dimension of economic behaviour (fx. how are people mislead), a type of research where the dichotomy of rational/irrational behaviour is irrelevant, or at least not very instructive. Check out the credit crunch. People behaved rationally according to the (perceived) logics of the system at the time. You could borrow money without the means to pay-off debt because everyone did so. At the same time, from a larger and long-term perspective it was irrational and dangerous to buy and build houses with credit and no means pay of debt. Now, with the recession all around, that second fact, again, has moved back into the focus of people's perception and they adjust their behaviour accordingly. They are rational, once more, but in a different, recessionist, world. Do perceptions matter? Absolutely! Without it, economist today could not make any valuable statements. It is facts AND perceptions!

Hausfrau said...

Hey I liked the post but I don't think that it is entirely true that non economists do not think about the oppurtunity cost. I think that they often just lack the understanding of the economy to try and "find" funding. I think it is more that they see a problem that they have a solution for and hope that politicians will see it as a worthy solution, which the government should find a way of funding.

Anonymous said...

If rational behaviour is defined as that which is aimed at achieving maximum satisfaction then it may not be too presumptious to say that people who make the 'best' choice given the information available to them are being rational. The question is, what information is available to the decision maker? Who really Knows?

The discipline of Economics is by all means not one which delivers exact answers (in fact it is generally off by more than a few decimal places). I find that so much emphasis is placed on the 'mathemization' of the science to the point where the theories which truly captures the big picture or the core issues are being ignored. Too many people (including Economists) wants to input the makings of our diverse economies in some magical mathematical formula and derive the 'unique' solution. Maybe, the objective reasoning of some Non Economists with no formulae will provide more rational insights.

tomnightingale said...

Quote: " 'Monthly house price figures show annual rate of House price inflation falls from 6.5% to 5.3%"

The BBC often says things like that. The problem it is NOT a rate. It is the year on year change, an average of rates over the preceeding 12 months. When prices are volatile averaging is (mostly) misleading. Recently (mid 2009) the BBC has talked of slowing inflation (roughly) when there have been price falls (CPI,RPI) and house price inflation slowing when house prices had fallen for several consecutive months. A year on year change is, more or less, a moving average...designed to smooth fluctuations. Not a good idea when trends change. A twelve monthe moving average tends to stay wrong for a long time, once the underlying trend changes.

Tim said...

Not only do economists not have a monopoly on rational thinking, the bit they do have comes from borrowing some maths. Have you heard the maths joke?

An astronomer, a physicist and a mathematician are on a train in Scotland. The astronomer looks out of the window, sees a black sheep standing in a field, and remarks, "How odd. Scottish sheep are black." "No, no, no!" says the physicist. "Only some Scottish sheep are black." The mathematician rolls his eyes at his companions' muddled thinking and says, "In Scotland, there is at least one sheep, at least one side of which looks black."

Not only does the rational thinking comment apply more to mathematicians, but this is a better joke (and economists don't get a mention).

After learning a bit of maths economists seem to just go off and invent weird terms to use as labels on their generalising graphs with no units.

Like "opportunity cost". If I spend my money on x I can't spend it on y. Do we really need a fancy term to make us feel cleverer than non-economists about it?

I agree about your point about "the government should do x...", but I would take it further. Actually government money is our (collective) money. From our taxes to be spent on us. A while ago a local paper started a campaign because a local hospital lost money invested in Icelandic banks. The headline was "Get the government to pay the money back!". Firstly the government didn't lose the money, and secondly what should it pay it from?! Of course, in the end the government caved and reimbursed the hospital, and in doing so increased its (our) debt.

Anonymous said...

1. Can you doa glossary page - e.g. main terms in economics
2. RE; Economists v non-economists - Most good things politically have occurred without the intervention of economists - social security (1909) NHS, universla child education, democracy - I have no doubt the opportunioty costs or whatevere would have been said to be debilitating. That is not to say that you keep an eye on your wallet - but sometimes you have to do what is right whatever the cost.
3. E v non-E - Your mortgage example is exactly what (I as a non-economist but profundly rational and scientifically trained person)have been thinking about for the past few years. If we borrow now at 2.5% and inflation is 3% and wage inflation is 3% then I am better off borrowing now. If I also fator in that I expect to be earning cosiderably more in 20 years as a CEO or something that is a rational gamble I make. Can that be applied to countries?
4. E v Non-E - In a Popperian world economists aren't scientists and so arguably not rational (especially as they have completely unfalsifiable theories which if they look to be proved wrong there is an always an explanation).
5. Who is buying governemnt bonds? My theory is that we are entering "post-economics" in that most of the world's debt is created by the USA (to fund its self-indulgent and protectionist lifestyle) and owned by China (already in 2005 according to Stiglitz 1 trillion in T-bills). China can't afford to call the debt (and can't afford to spend it) as USA buys most of its stuff and the rest of the world would be plunged into depression as they also sell to the USA. Therefore debt is now an integral part of individual countries' and the world's economy which will never be recovered in full from a sovereign state (except possibly the really poor ones in Africa). We therefoe need a new pseudo-science to describe this world (I also think it applies to the domestic level in the West as well).
6. If you time your acquiring of debt well, are lucky/well-placed/think it through then it will increase your net worth over time. Basically we are all at the casino...