# Most “economists” aren’t

by on February 18, 2006

I’ve always thought that an economist is someone who understands opportunity cost. If there is one thing a first-year undergraduate economics course should teach, it’s an understanding of this concept. So it’s alarming to discover that most members of a sample drawn from participants in the profession’s most important conference are not, at least by my definition, economists.

Via Harry Clarke, I found this paper by Paul Ferraro and Laura Taylor (guest registration or subscription required). Ferraro and Taylor presented their volunteer subjects with this question:

‘You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative. Tickets to see Dylan cost \$40. On any given day, you would be willing to pay up to \$50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton?

(a) \$0
(b) \$10
(c) \$40
(d) \$50.

Take some time to think before looking over the fold

The correct answer is (b), the net value to you of buying a ticket and attending the Dylan concert, which is your next best alternative. This isn’t the easiest of opportunity cost questions, and, in a first-year undergraduate exam, it would distinguish those who’d really learned the concept from those who’d memorised the definition.

Still it’s not that difficult, and doesn’t involve any tricky thinking about information as in (say) the Monty Hall problem (it’s adapted from the intro textbook of Frank and Bernanke). Allowing for the fact that some people can get jobs in economics with a good technical training but no real understanding of economics[1], I’d have expected maybe 70 per cent of grad students or PhD qualified economists to get it right.

In the Ferraro and Taylor study, the proportion choosing (b) was 21.6 per cent, the least of any answer and worse than if everyone had picked at random. Since presumably some people did choose at random, this suggests that less than 20 per cent of “economists” are actually economists, at least by my definition.

fn1. I blame game theory myself, but then I always blame game theory. And opportunity cost reasoning is just as essential to game theory as to economics, even if its role is not so explicit.

1

Raw Data 02.18.06 at 11:44 pm

I’d suggest that “transaction cost” is right up there with “opportunity cost” in importance.

2

jet 02.18.06 at 11:50 pm

(e) \$10 and a lifetime of regret at seeing Clapton over Dylan (there was a reason the tickets were free).

3

joel turnipseed 02.19.06 at 12:14 am

Interesting. My grandfather-a labor economist trained half mathematically/half institutional school–he got his PhD at Harvard in late early 50s) taught me the principles of sunk costs and opportunity costs when I was a youngster (12 or so), while illuminating them with the idea of Nietzsche’s “eternal recurrence.” In reflecting on this, after jet’s comment, it occurs to me that with questions like this, it’s easy to let “non-rational” elements into play–but also, to see how the non-fungibility of a lot of experience also makes the “rational” elements seem, well, irrational (or, at least, no wholly rational).

4

Brandon Berg 02.19.06 at 12:27 am

This came up several months ago over at Marginal Revolution. One of the commenters had this to say:

I was one of the subjects of this study at the 2005 AEA meetings. I was on the job market and had gone to the 4th floor of the hotel to check on where my interviews were going to be. As you might imagine, I was incredibly stressed out and distracted. I was then approached by somebody who wanted me to fill out this form. I can’t remember what I answered (hopefully, the right answer!), but I do remember thinking (a) this seems like a trick question, so the obvious answer is probably not the right answer, and (b) this is the last thing I want to be doing right now.

I blame selection bias. Obviously anyone who really understood the concept of opportunity cost would have declined to participate.

5

DD 02.19.06 at 12:28 am

Marginal Revolution

Marginal Revolution

6

Rothman 02.19.06 at 12:59 am

The questioner completely misunderstands the idea of opportunity cost, but as this was discussed at Marginal Revolution I won’t go in to the details. Suffice it to say, Mr. Quiggin should be more careful and I dare say Mr. Clarke too.

7

Walt Pohl 02.19.06 at 12:59 am

John: What’s more likely, that economists as a group don’t really understand the concept of opportunity cost, or that the study was in some way not well-designed? (Brandon gives a plausible account of the latter.)

8

John Quiggin 02.19.06 at 1:17 am

The stress factor doesn’t explain worse than random correct response rates, Walt. But I hope you’re right.

9

“The stress factor doesnâ€™t explain worse than random correct response rates”

and ummm…

“the proportion choosing (b) was 21.6 per cent”

and ummm… an N of what? (I don’t have a subcription). So t(N-1)=(25-21.6)/st.err, probably will get you about random. Even more plausible if you expect, as you indicate above, that there are about 30% or so genuine dummies in the sample.

And really, AEA job market intervies are not the place to be giving out surveys of any kind. Free coffee yes. Surveys no.

10

econgeek 02.19.06 at 2:53 am

As Brandon Berg points out, if one truly udnerstand oportunity cost it is not evident why on earth one would bother in thinking about the problem. It does propose a simple experiment that can test this and is more consistent with economic theory; have gradute students answer a variation on the above problem and get payed X dollars if they get it right. Do people really think the answers would be this bad?

11

whichferdinand 02.19.06 at 3:46 am

N = 199, but I’m not calculating confidence intervals. The paper is available for free on Ferraro’s site here:
http://epp.gsu.edu/pferraro/docs/ferrarotaylorbep.pdf

By the way, isn’t the bolded part here: “Bob Dylan is performing on the same night and is your next-best alternative” strictly speaking unnecessary? If on “any given day you are willing to pay up \$50 to see Dylan,” it follows that on any given day you can’t get more than \$10 in net earnings, doesn’t it?

12

whichferdinand 02.19.06 at 3:51 am

Ah, OK, sorry, actually it is necessary. There’s no guarantee the Dylan tickets always cost the same.

13

James Wimberley 02.19.06 at 4:29 am

The idea that individuals have well-structured demand functions and reservation prices for everything is a fantasy – it’s combinatorially impossible for an animal brain to rank the universe of possible shopping carts in Wal-Mart, let alone the whole of life. So actual shopping and leisure choices must be made in some other way. The concept of opportunity cost may be clear, but is it really as important as John Q and the survey team think?
Even for investments, it’s rare for a company to have a fixed pool of capital available for project A or B. The rational course for a firm is to carry out all projects where the expected, risk-discounted yield is greater than the cost of capital, and the lexical ordering of the good projects (with the parallel schedule of relative opportunity costs) is irrelevant. The one case where opportunity cost seems essential is land use, where the choices are exclusive.

14

bad Jim 02.19.06 at 4:35 am

I’d quibble with the question’s setup, particularly the stipulation that “you would be willing to pay up to \$50 to see Dylan”. Suppose rather that tickets to any other Dylan concert cost \$100. The opportunity cost of skipping this performance would then be \$60, no matter what your preferred ticket price might be.

It’s not out of the question that the subjects of this experiment were aware of actual ticket prices. (Reality check: examine tickets on hand: Vienna Trio, \$58. Pacific Symphony, \$78. Julliard Orchestra, \$60. London Philharmonic, \$93. Opera Pacific, Aida, \$165…)

For that matter, how long until the next Clapton or Dylan concert? I think this experiment out to be taken out and shot.

15

Tim Worstall 02.19.06 at 5:32 am

As I got the answer right where do I collect my Ph.D.? It would be a definite step up from my current B.Sc.

Or is reading Marginal Revolution (as many have pointed out) not sufficient study to collect the higher degree?

16

elton 02.19.06 at 5:33 am

Please tell me again: I should take seriously any economists because…???

One more thing: An Olympic Gold Medal goes to the first person who can find an actual example of where and when in fact Clapton and Dylan were playing rivalling concerts on the same night in the same town.

17

Matt Daws 02.19.06 at 5:49 am

Can someone explain the question to me. I read it that the concerts are going on at the same time, so I can only attend one. I am told I prefer Dylan, and I have a free ticket. So why would I go to the Clapton concert instead, based on the information available? What am I reading wrong?

18

Oskar Shapley 02.19.06 at 6:37 am

I got it right after several minutes of careful thinking to make sure I’m not missing something. The results of my students:

N=10

(a) 8
(b) 1
(c ) 1
(d) 0

19

Sean Kellett 02.19.06 at 6:37 am

Matt, the free ticket was for the Clapton concert, not Dylans’.

The question is badly worded – the Clapton bit is in fact a redherring, since it has no affect on the result.

Here’s a better way to word it for all you husbands out there.

Your wife comes home and tells you there is a sale on at Myer. 20% off all babywear! Yippee! That cute jumpsuit she was so willing to buy at \$50 is now only \$40!

You groan, pointing out that your baby already has 10 jumpsuits and that buying another one is a waste. Your wife pleads with you, using the classic argument: “but if we buy the jumpsuit then we will be *saving* money” !!!

How much money will you ‘save’ by buying the jumpsuit? Or, in other words, what is the ‘opportunity cost’ of not buying the jumpsuit?

Cheers,
Sean.

20

Sharon 02.19.06 at 6:50 am

I’m with elton and matt. As a non-economist, I’m still hazy about exactly what opportunity costs are anyway. Worse, the example does nothing to help me understand what’s so important about them. It just seems to reinforce the stereotype that economists know nothing about human psychology, how people in the real world actually think, feel or behave. The assumptions that you have to make to get an answer sound bizarre. And using something as subjective (and non-rational) as musical preferences as a basis for an exercise in objective reasoning might make sense to economists, but it just looks ridiculous and, frankly, spurious to the rest of us.

The economists here think that this is some woeful, embarrassing display of ignorance among their own kind. The non-economists think that it’s just another example of the utter irrelevance of economists (and why they should never be let loose running the real world).

21

John Quiggin 02.19.06 at 7:02 am

Matt, your free ticket is to the Clapton concert. You have to pay \$40 to attend the Dylan concert.

Coming back to the problems with the experiment, I find it hard to imagine a good economist getting this one wrong even under stressful conditions.

Sharon, I think there are plenty of practical examples where opportunity cost reasoning would give you a better answer than most alternatives. For example, it gives a strong case against the Iraq war. Of course this is an instance where the practical people sidelined the economists, among others who had some idea of likely costs and benefits.

22

Matt Daws 02.19.06 at 7:40 am

Thanks for the reply, but I’m still a bit confused. In the real world, I would surely always go to the Clapton concert, as:

a) I prefer Clapton;
b) I already have a free ticket.

What’s the downside? That I miss Dylan, for which I I can get a ticket for 10 dollar’s less than what I’d be willing to pay. As an economist, surely the average (or expected or whatever) cost of a ticket to Dylan, and a ticket to Clapton, has to figure somewhere, doesn’t it? If tickets to Dylan are usually 200 dollars, but I can also get a free ticket for Clapton tomorrow as well, then I get the Dylan tickets. But if the numbers are different, my choices change. I’m really siding with sharon and elton here.

Sean, I get your analogy, but wouldn’t it be closer if you also mentioned that the Husband saw that they were giving away nicer jumpsuits at another store, but it’s out of town, so you can only drive to the one store…?

23

Matt Daws 02.19.06 at 7:44 am

Sorry, yes, I see I swapped around the names in my original post. Sorry!

Yeah, okay, I now see the point. I give up 10 dollars (which I would have saved by getting cheap tickets to see Dylan) by going to see Clapton. But in the real world, shouldn’t the massive benefit of seeing a better (in my opinion, as stated in the question) artist for free also count? But that’s not relevant to the quiz, as such, so point taken.

24

John Emerson 02.19.06 at 8:15 am

From an economist’s point of view I suppose that the Clapton part was a red herring, but from the point of view of the actual choices people make, it’s not. Suppose (cost aside) your utilities were Dylan = 50, “Sitting for three hours and looking at a wall” = 0, and “Sitting for three hours and listening to Clapton” = -50.

This doesn’t show up in the dollar values, where the disutility of a free Clapton concert is not expressible, so the utility-opportunity-cost of the Clapton concert is underestimated.

This might be an example of the pitfalls of spicing up logic exercises with “relevance”, or it might just be a reminder that economics is only tenuously related to reality.

25

Oskar Shapley 02.19.06 at 8:19 am

The question is badly worded â€“ the Clapton bit is in fact a redherring, since it has no affect on the result.

It’s expected that economists who understand opportunity costs are able to distinguish relevant information from irrelevant noise – the basic reading comprehension.

In other words, the red herring is PART OF THE TEST.

26

John Emerson 02.19.06 at 8:29 am

In other words, economists are supposed to understand that opportunity cost is not about actual choices.

27

abb1 02.19.06 at 8:33 am

Let’s say you would gladly pay \$30 to see Clapton. You get a free Clapton ticket and you think it made you 30 bucks richer, but because of the Dylan option you’re only \$20 richer, because you’ve forgone that profitable Dylan concert – is it the point all this?

If it is, it doesn’t seem to make much sense.

28

J Thomas 02.19.06 at 8:58 am

Matt, the idea is to try to put a quantitative value on your choice.

It’s like, at some prices you just wouldn’t bother, it costs too much. and at some prices you’d snap it up. But there’s one price in the middle somewhere that you basicly wouldn’t care, you value the money precisely as much as you value what you’re buying. Of course it isn’t right to say you wouldn’t care. You might not, you might desultorily choose one or the other on whim because it just doesn’t matter. Or you might agonise that you really really want both of them and you can’t have both.

The difference between what it actually costs versus the amount of money where you don’t care (or can’t choose) is a quantitative measure of what you give up by not doing it. It isn’t a *good* quantitative measure, but it’s hard to find a better one.

So, if \$40 is all you’ve got for tomorrow’s motel room plus meals, then that Dylan concert is very very important to you or it wouldn’t be your second choice.

It’s a potentially useful theoretical concept, even though real examples tend to be too complicated to work out well.

For example, say you’re waiting in line at the Clapton concert, and Ginger sees you. Usually you’d be just barely willing to spend \$180 for a night with Ginger, but she’s feeling lonely and she offers you a freebie. That would indicate an opportunity cost of \$180 to see the Clapton concert. But if you spent all of last night being energetic with Sonya, maybe your desire for Ginger is much less tonight. Tomorrow night she’d be worth \$180, but tonight maybe only \$50. But then, maybe it isn’t an either/or choice after all. If you can get a Clapton ticket for her for \$40, then the opportunity cost of spending the night with her is only \$10, versus going home alone.

Only it’s never that simple, is it? What if your friends see you treating Ginger like a date, you might never live it down. And if you start acting nice to her there’s the chance you’ll fall in love with her and maybe marry her, and that can result in years or decades of opportunity cost.

It’s easier to figure opportunity costs when the word problem tells you what the second-best alternative is. When it’s a stream of alternatives that doesn’t stop, it’s harder to choose.

29

abb1 02.19.06 at 9:24 am

Instead of going to either concert you could dig a \$100 ditch or maybe even write a \$1,000 article for the Economist. Forget Dylans and Claptons, start diggin’.

30

Tom Steinberg 02.19.06 at 9:29 am

John, as a lurker for a long time here you’ve just provoked me to post for the first time. Despite having worked for an economics think tank, and being a constant bore about opportunity costs, I’m leaning somewhat with the doubting Thomas crowd. I think this is a poor question that doesn’t do the concept of opportunity costs any favours.

Some opportunity costs are concrete. You build a shop that makes \$500 instead of one that makes \$1000 and all other things being equal you’ve got an opportuniy cost of \$500. But other opportunity costs, like those in this question are stand-ins for psychological evaluation, projected through the lens of revealed preference. The \$50 here is a psyschological valuation, the \$40 is the market price, the difference is the \$10 opportunity cost. I have no problem with that.

The problem is with this is you’ve only got one side of the equation – there are costs and benefits of both side which produce the total opportunity cost here: it simply isn’t legitimate only to look at the Dylan side.

The market price of the Clapton ticket is zero, so we are expected to ignore it. But we can’t, because we have to know what the person in the question would you have been willing to pay for it , to produce a meaningful final answer.

If the evaluation is \$0 (ie you hate Clapton) then your personal view of seeing him would be that you forfeited up to \$50 of musical pleasure (your opportunity cost). This is exactly how any disgruntled music fan stuck at the wrong gig would feel. However, if you would be willing to pay up to \$500 to see Clapton, and only \$50 to see Dylan, you’d walk away feeling a winner, and I’d challenge any economist to argue straight-faced that you really weren’t.

This question is flawed, but useful in that just like a good philosophical counterexample, it reveals how a specific strict definition can produce a non-useful, non-meaningful result.

31

jet 02.19.06 at 9:43 am

This is great. Several Timberite commenters are now arguing that the economists of the world are out of touch irrelevants, which implies they agree A) Aliens control the economy, or B) The Invisible Hand of the Market controls the economy.

This is going to be an odd day.

32

Barry 02.19.06 at 9:49 am

Jet, as usual, your logic is lacking.

33

Tim Worstall 02.19.06 at 10:13 am

“One more thing: An Olympic Gold Medal goes to the first person who can find an actual example of where and when in fact Clapton and Dylan were playing rivalling concerts on the same night in the same town.”

No, no proof, but I wouldnâ€™t be at all surprised if it did in fact happen. Dylan was in the UK a lot mid sixties, Clapton with the Yardbirds/Cream/John Mayall.

34

bryan 02.19.06 at 10:54 am

Okay I understand the example, and the opportunity cost is \$10.

Here’s another scenario:

I have altogether \$10. I go to the store and there are two products I can buy, each costing a total of ten dollars.

Product A is discounted by 9 dollars.
Product B is discounted by 10 dollars.

I would like to buy either one of these products normally for their normal price, but I only have 10 dollars.

If I buy A is my cost for A 10 dollars and an opportunity cost of 10 dollars?

If I buy B is my cost for B 10 dollars and an opportunity cost of 9 dollars?

In other words, does economics tell me that my response to this situation should be the commonsensical one of buying product B?

And is the common sense phrasing of this problem: “well, buying B means I get a greater discount and I like buying B just as much as I like buying A.”
equivalent to: “the combined cost and opportunity cost of B is 19 dollars, 1 dollar less than the combined cost and opportunity cost of buying A, therefore only a damned fool would buy A.”

35

freddie 02.19.06 at 11:13 am

Have you ever tried buying tickets for concerts by either one of those two performers? Then rethink prices you are giving.

36

J Thomas 02.19.06 at 11:23 am

Bryan, I believe you got it backward.

In theory, if you think A is worth \$20 and B is worth \$19, and you can get either one for \$10, you should buy A. It’s worth more to you.

Say that tomorrow you get another \$20, but the prices are back to normal. If you get A today and B tomorrow, you spend \$29 total to get both. If you get B today and A tomorrow then it costs you \$30 for both.

The point of the exercise is to notice the idea. You can’t get everything, you have to choose, and you do better if you can choose the items that give you the most benefit for the least cost.

If you try to apply the idea uncritically then it gets all complicated and unworkable. Like, say you have 50 unopened bottles of A at home, but it’s been awhile since you’ve had any B. You might likely change your priorities, you’d pay \$25 for B if you had to, and only \$5 for yet another A. The available alternatives might change, and how much you’re willing to pay changes too.

So you don’t actually try to solve this sort of problem in real cases any more than you try to figure out what the money supply is when you do macroeconomics.

37

anonymoustroll 02.19.06 at 11:38 am

(e) There is no such unicorn as a free ticket to see an Eric Clapton concert without no resale value.

…more proof that even honest-to-god, bona fide “Economists” (please note the capitalization) are completely disconnected from reality.

38

peter ramus 02.19.06 at 11:51 am

Opportunity Cost!!!!

The USA would have done better at curling if our top sweepers didn’t miss the Olympics because they have to report to spring training to call balls and strikes.”

— Scott Ostler, San Francisco Chronicle

39

John Emerson 02.19.06 at 11:52 am

Jet, some say economics is in turmoil:

Fullbrook et al, “What’s Wrong with Economics”;
Colander et al, “The Changing Face of Economics”;
Mirowski “Machine Dreams”.

40

bryan 02.19.06 at 12:23 pm

“In theory, if you think A is worth \$20 and B is worth \$19, and you can get either one for \$10, you should buy A. Itâ€™s worth more to you.”

Well I guess going by this it seems that I was right, given that I thought that A was worth 19 and B 20:

“Product A is discounted by 9 dollars.
Product B is discounted by 10 dollars.”

41

Mike 02.19.06 at 12:46 pm

Ok. Everybody go back to dictionary.com and get a refresher of “Opportunity Cost”. Ok. Now, let’s break it down for the economists out there.

Opportunity Cost has to do with return on investment. “On any given day, you would be willing to pay up to \$50 to see Dylan” means that you believe that a Dylan concert is worth \$50, that is to say, your return on investment is \$50 worth of enjoyment at a concert.

If you can get (what you believe to be) \$50 worth of concert for \$40, then your return on investment is \$10 off of a \$40 investment.

Now, that is not opportunity cost. We haven’t gotten far enough for that yet. We need a choice of investments in order to calculate that.

Our other investment possibility for the evening is the Clapton concert. In fact, we were given a free ticket, so our investment is \$0. What is our return on investment? What? It isn’t specified? How much do we value the Clapton concert? Who knows? We can make no assumptions here. There IS a red herring in the question: “[the ticket] has no resale value.” The resale value of the ticket DOES NOT equal your return on investment. You are not a scalper, you are a concert goer, and our returns are measured in our perceived value of the concert.

So in order to calculate the opportunity cost, we would have to subtract the return on investment of going to the Clapton concert from the return on investment of going to the Dylan concert. Since we are not told what we feel the value of the Clapton concert is, we cannot answer the question.

Now for a bit of further analysis: if Dylan is “your next-best alternative”, you can infer that the Clapton concert has a positive value for you, in which case we can rule out c) and d), since you can only acheive c) and d) if the return on investment of the Clapton concert has a negative value. Now, if you were a literal-minded economist, you would say “next-best” means that the return on investment of a “next-best” option is less than the first option, meaning the Clapton concert has a higher value to you than the Dylan concert, thus there is no Opportunity cost at all, and you would have to pick a).

I don’t think we can take that liberty with the question, though, because I don’t want to assume that it was a trick question. I’m just going to assume that the questioner is misapplying the concept of opportunity costs.

-mike

42

All this “but I actually like Clapton better hence economists don’t know what they’re talking about” crap is a good reason to always use Good X and Good Y in your economic questions and examples. And always use widgets. Since folks are often incapable of abstraction on their own, it must be done for them. And as far as giving e) type answers, you’re overthinking it. Don’t novelize the question. This isn’t English lit. (But yes, the wording of the question sucks and all that)

And John E. I don’t know what you mean by “in turmoil” but the Colander article (and his other stuff) is pretty good. Even if there really is no such thing as “Neoclassical Economics”.

43

elton 02.19.06 at 2:03 pm

Please tell me again: I should take seriously any economists becauseâ€¦???

44

hirvi 02.19.06 at 2:11 pm

What #21 said.

45

jet 02.19.06 at 2:19 pm

Barry, next time I’ll stomp my foot so you can laugh with everyone else. If someone mentions aliens, you can be 100% positive they are not being serious.

46

harry clarke 02.19.06 at 2:21 pm

I’ve read the comments and still think that the failure to give the correct answer is a problem for economics education. The ability to identify the costs of taking certain actions in somewhat complex situations would seem to be a basic requirement to be an effective economist.

The idea of evaluating situations in terms of what you have to forego net is basic.

When I posted the problem on my blog I was not aware of the discussion at Marginal Revolution (the paper was originally pointed out to me by a colleague, John King). But having now read the discussion there also I again think a real difficulty has been identified.

Economics programs often do attempt to teach too much and become bogged down in technicalities. Technique is important but so too is learning basics.

Some of the best Australian economists tended in the past to come from agricultural economics backgrounds where lots of emphasis was placed on partial equilibrium analysis of particular markets. Less weight was placed on technique and general equilibrium analysis. I wonder if the emphasis on basics here is the reason for their comparative success.

Unfortunately agricultural economics is fast disappearing and being replaced by programs that emphasise mechanism design and game theory. Good stuff – and you can certainly display vast intellectual skills with it – but simply not so central.

47

John Emerson 02.19.06 at 2:46 pm

Jet, it’s hard to tell when you’re serious. The possibility “never” has occured to me

“Even if there really is no such thing as â€œNeoclassical Economicsâ€.”

Explain that to the co-editors of the Collander book, who distinguish it from Institutionalist, Austrian, neo-Keynsian, Marxist, and feminist economics. Joan Robertson called it neo-neoclassical, since the neoclassicals were Marshal, et al, and the classicals were Ricardo, et al.

The people in the second book call themselves “broadband” economists. They used to be “post-autistic economists”, but the term was an unfortunate one.

I’m not actually sure that econ is in turmoil, but from these books it seems that it should be. The Collander book is by mainstream people who are trying to convince the profession to meet the challenge.

Ironically, these attack (basically from the left) coincide with the hard right’s decision to ignore the fiscal economics, after riding to power in part on a wave of dogmatic free-market ideology. Such is life.

48

John Quiggin 02.19.06 at 2:53 pm

Matt, it seems to me in this case, you have the opportunity cost answer right. You like Clapton (value the concert more than \$10) so you go.

49

John Emerson 02.19.06 at 3:06 pm

If you liked Clapton and Dylan equally well, the opportunity cost of going to the Dylan concert would be \$50, right?

I suppose that part of being an economist is knowing how to tease the specific question (opportunity cost of Dylan) out of the whole story, but it seems to me that this kind of analysis is best applied to things like alternative investment opportunities rather than to consumer entertainment choices.

To put it differently, the opportunity-cost question asked, in this context, is not really very useful in the actual analysis of the actual choice selected for an example.

For example, after the fact, an investor who had made an investment choice for business purposes would end up with a tangible gain or loss based on his choice between tangible investments, whereas an entertainment consumer ends up with nothing but intangible memories after a choice between two intangible potential experiences of two different musicians.

50

cm 02.19.06 at 3:13 pm

The Wikipedia article appears to imply that opportunity cost is specific to the choice, i.e. it is the difference between the max net benefit of other alternatives and the to-be-chosen alternative, under some cost/benefit model. That is, when the costs and benefits can be expressed in comparable terms.

If that is so, I have to concur with #41.

Or is opportunity cost used in an alternative-specific way? I.e. the opportunity cost of not going to Dylan, of not going to Clapton, of not getting a good night’s sleep, etc.? That would be equivalent to comparing ROIs (again with the caveat of comparability).

51

Richard Harmer 02.19.06 at 3:48 pm

This question and its book answer are such fine examples of the shallowness of thought that characterizes much of pure commodity economics.

It’s clear that Fred prefers Clapton over Dylan, otherwise Dylan would not be next-best.

Given Fred’s preference, let’s say he’d pay \$20 more to see Clapton over Dylan on any night he had to choose between the two.

If a ticket to Dylan costs \$40, Fred would pay \$60 to see Clapton.

Since he’s getting that ticket for free, however, he has a net benefit of \$60 going to the Clapton concert.

To get a net benefit of \$60 from the Dylan concert, the ticket to that concert would need to be minus \$10. Given the Clapton ticket is for free, the Dylan ticket — for that night, given the other opportunity — is less that worthless.

52

John Emerson 02.19.06 at 4:12 pm

To continue. What I doubt is that applying opportunity-cost analysis to enetertainment choices is useful. The idea of this analysis is that it will make a superior comparison of the choices possible by giving a dollar valuwe to opportunity cost, and with investment choices it does, but not entertainment choices.

Case A. “If you go out drinking and spend the \$200, you won’t be able to go skiing tomorrow”. What’s the opportuity cost here, if not the \$200 which is given in the problem itself? Presumably it is the difference between the value of gambling and the value of skiing, but these are not quantifiable. The question you started out with is simply “skiing or drinking” and an opportunity-cost analysis leaves you with that question. No payoff.

Case B. “If you spend the \$200 painting the front of the building, you won’t be able to repair the backhoe and you’ll immediately lose the Jones contract, which would net you \$2000, plus any succeeding contracts needing a backhoe. By contrast, the immediate business advantage from a freshly-painted front is slight.” In this case, the payoff of competititve-advantage thinking is pretty clear.

53

John Quiggin 02.19.06 at 5:02 pm

John E, the opportunity cost of going to the Dylan concert is \$50 (ticket price) + the value to you of the Clapton concert (for which you already have a ticket).

So, if you value the two equally, you should go to the Clapton concert, and save \$50. I think this matches up pretty well with common sense.

54

John Emerson 02.19.06 at 5:25 pm

What I doubt is that there’s a payoff from applying this analysis to this case.

Most people would always go to a free concert rather than pay for one, all other things being equal. In this case someone who liked Clapton much at all would probably go to the Clapton concert unless they absolutely worshipped Dylan. The quantification of the opportunity cost of Clapton at \$10 doesn’t illuminate the choice much.

Presumably according to this formula you’d go to the Clapton concert if you thought it would be worth \$11 to you, but does anyone really think this way? Or should they? The major expenditure in going to concerts is the dedication of scarce leisure time, and given the choice of a \$50 concert for \$40, an \$11 concert for nothing, and staying home, a lot of people would just stay home unless they really wanted to get out of the house and had some money in their pocket. And scarce leisure time would probably go to Dylan.

As I’ve said, opportunity-cost analysis is often very useful. Not here. It doesn’t violate common sense, not much anyway, but it doesn’t add it it or correct it either. No payoff.

Perhaps what is being tested for in this case is first, testsmanship, and second, the ability to take unrealistic examples at face value. Both of them important in economic science.

55

J Thomas 02.19.06 at 5:30 pm

Bryan, oops! When I reread your comment it looks like you got it right and I got it wrong. Sorry about that.

56

Matt McIrvin 02.19.06 at 5:38 pm

I recall that the first time I saw this, I guessed the supposedly right answer, (b). Having never taken any economics, I wasn’t clear on what “opportunity cost” meant and guessed something that turned out to be consistent with what the quiz was looking for. My reasoning was: if you think of the amount you’re willing to pay for Dylan as a measure of the utility you get out of a Dylan concert (those economists are always talking about utility, right?) then by going to the Clapton concert you’re turning down an apparent offer of \$10 of free utility, so that’s the opportunity cost.

However, the economists in this thread seem to be saying that there are higher-order subtleties of some sort that actually make that the wrong answer if you know more economics than the people who wrote the quiz. So I bow to them.

57

Matt McIrvin 02.19.06 at 5:46 pm

It seems as if a lot of people are objecting to answer (b) because they think it’s implying that going to see Clapton is the wrong choice. But I didn’t think that “the opportunity cost of seeing Clapton” was supposed to be the whole calculation of whether you’re ahead from the transaction. It’s just one piece. It’s not supposed to include the benefit to you of seeing Clapton; that’s the other part of the calculation.

58

John Emerson 02.19.06 at 5:53 pm

MAtt, most of us aren’t economists either.

Quiggin’s point was that many trained economists apparently misunderstand and misuse the technical concept of “opportunity cost.” As far as I know, he’s right in his basic point.

59

derrida derider 02.19.06 at 6:23 pm

matt has the simple answer absolutely correct.

60

derrida derider 02.19.06 at 6:23 pm

matt has the simple answer absolutely correct.

61

John Quiggin 02.19.06 at 9:35 pm

“Post-autistic” was a terrible name; from the same kind of thinking that gave us “anti-idiotarian”. It’s no wonder that criticisms/alternatives presented under this label were ignored.

I’m glad to hear it’s been dumped, but “broadband” seems to invite confusion with applied economists working on telecommunications. It doesn’t give much of a hint as to the central ideas being proposed.

More generally, I think the whole idea of “schools of thought” in the social sciences has probably had its day. I might try a post on this.

62

muzzlehatch 02.19.06 at 11:53 pm

alright, as long as we’re debunking problems, I think the Monty Hall ‘question’ is inaccurate.

The ‘answer’ does not in fact refer to the ‘actual situation’.

In the opening situation there are 3 doors, I choose one, 1 of the others is shown to be a booby prize, that leaves 2 doors, I either have the right one or the wrong one, so 50/50 if I change, so it makes no difference if I change or not.

The answer given is based on the fact that if I changed 2 OUT OF 3 TIMES I would be right in changing, hence my chances have ‘doubled’ if I change. In actuality however I do not have 3 times, I am only there ONCE. Therefore my actual probability if I change is only 50/50, so there is no intrinsic point in changing.

63

cm 02.20.06 at 1:57 am

john emerson (#54): Your argument is consistent with those ascribing a substantial positive worth to the (free) Clapton concert, let’s say W. No, bad letter, let’s say C. Then the “net benefit” of the Clapton concert would be C-\$10 (discounted by the opportunity cost of the “next-best” alternative). Of course that’s still disregarding the opportunity cost of spending \$40 — you can have a nice dinner for two, pay a few days’ rent, fill up and get an oil change (maybe not at today’s fuel prices), etc.

Not unrelated point on “differential” cost measures — often there is an implied assumption that the “base” amount of money involved is free. I guess it’s a feature of US economic thinking.

64

abb1 02.20.06 at 2:17 am

Of course thatâ€™s still disregarding the opportunity cost of spending \$40â€”you can have a nice dinner for two, pay a few daysâ€™ rent, fill up and get an oil change (maybe not at todayâ€™s fuel prices), etc.

Imagine that “Dylan concert” is the name of a place where you can simply exchange your \$40 for \$50 and “Clapton concert” is the name of a place where you can exchange your free coupon for 11 bucks – and they you’ll see that your “opportunity cost of spending \$40” objection doesn’t make sense.

But the whole point of all this is, if I understand correctly, that rock concerts are not, in fact, places like that; it’s a bit of a stretch to apply this to rock concerts…

65

JohnLopresti 02.20.06 at 2:48 am

Knowing the terms’ meaning is the economist’s art. Additionally, the proportion of incorrect answers related to the setting, namely, the question was asked at a public meeting with sideline job interviews and social gatherings; the social context colored factors much like the proposition of who would stop to sign a political signature gatherer’s petition form. Maybe this contextual factor is part of what you alluded to in your mention of game theory.
Some replies I enjoyed were the ones that tended to examining other derivative mathematical views of value; immediately one instance that came to mind was marcom prognostications during the telecom bubble in 1999 concerning how to motivate the cellphone viewer to shop, and how to datamine cellphone owner behavior analysis records. Overlaying cost analysis on the r+d expenditure to sift the data and design the behavior filter templates, and deploy the database servers into the neighborhoods haunted by the correlated cellphone owner(s), or by later technology, to map the behavior onto geographical maps.
Yet, somewhat irrespective all these parsings, other values need to map onto the proposition of the question as actually asked; and, humorously put, it is estimable that those other parameters torsed the anticipated correct-answers curve beyond wildest predictions.
Because the question was asked in very real societal terms, i.e., describing parts of decision trees as acquirable entertainment values, survey respondents were further driven off the scent of the simple answer.
One of the several threads I read through the links you provided contained a professor’s rudimentary restatement of what, on a quiz, would have been a fractional statement of the question, but an encapsulation more direct in language terms; his question was easy to answer quickly, as it was barebones and not clothed in attractive diversions.
And here, too, we arrive at yet another interesting avenue for economists’ activity, the craft as newly responsive to Sarbanes-Oxley, at least on US shores.
Having read and written a bit based on such business literature as the corporate prospectus compared to SEC quarterly statements, compared to corporate investor website content which dynamically varies and which is responsive to such software elements as cookies, passwords, permissions, adware and the like, I suspect that, far from a withering science, economics, indeed, has a place in the sun, if our governments are to rely on good economists to help structure our development and integration.
I imagine your cite of the Bernanke book is associated with the living theory as it is beginning to be applied.
_____________
The professor who rephrased the survey question fairly without the spurious and partial information attributes is: J at Sep 2, 2005 2:16:05 PM on the thread at MarRev; the MarRev site only has text links so you will have to search on the time parameter to find the commenter whose name begins with J there; I have omitted the full name out of deference. It is always nice to have a prof who makes it easy.

66

Chris Bertram 02.20.06 at 2:49 am

Muzzlehatch, think it through. Suppose there were 1,000,000 doors, you picked one and the host then revealed that 999,998 of the others were fakes. Would you still think that the two remaining doors were equally likely? Or would you recognize that the one you hadn’t initially picked was overwhelmingly likely to conceal the prize? What are the odds?

Now reduce the total number … eventually to 3.

Still think the probability is 50:50 ?

67

abb1 02.20.06 at 2:56 am

…however, even if we do assume that emotions induced by a concert can eventually be converted into dollars (e.g.: Dylan will inspire you write \$50-worth of a song), there’s still a small problem: you are taking the \$40 to pay for Dylan’s concert from your interest-earning bank account and thus the opportunity cost is somewhat less than \$10.

68

John Quiggin 02.20.06 at 4:56 am

In thinking about the problem, Muzzlehatch, it’s important to remember that Monty *always* opens a door with a booby prize. If he just opened a door at random, and the game ended in the case where it was the real prize, your reasoning would be correct.

It’s easy enough to see, if you think about it, that the problem is essentially the same as this one. Monty offers you the choice between picking one of the three doors or waiting until he’s opened one with a booby prize, and then picking one of the remaining two.

Still, I’d say that this problem, with time to think about it, is still harder than the opportunity cost problem, presented in a distracting and stressful setting.

69

Matt Daws 02.20.06 at 5:53 am

Hmm, having read through this all, I have to agree with #65, and the commentator at Marginal Revolution who re-worded the question. It’s an awful question. We’re told that we value Clapton over Dylan, but are then meant to ignore the value of going to the Clapton concert, apparently.

What’s wrong with the following idea. My TV has broken, and after doing research, I decide on either sets #A or #B, which I’m prepared to pay \$500 for. I’ve read lots of reviews which say the picture on #A is a bit better.

i) I get to the store, and sure enough, both sets cost \$500. So chosing #A gives an O.C. of 0, and so I go with #A, as it’s the better model.

ii) I get to the store, and #B is discounted to \$400. So, choosing #A will involve an OC of \$100, and hence I have to decide if the extra quality of #A is worth 100 bucks or more.

iii) I get to the store, and now #A is discounted to \$400. So, choosing #A will involve an OC of 0
(surely -100 just makes no sense), so I’d be insane to choose #B.

Carrying this through, if #A is actually free (say I won a raffle) and #B is 400, then surely the OC must infact be 0 (as I guess negative OC doesn’t make much sense). So how does this differ from the question involving Dylan and Clapton?

70

abb1 02.20.06 at 6:15 am

It deffers because you only want one TV, while you’d like to see both Clapton and Dylan. It’s more like if you wanted a TV and a microwave but you only have time to buy one thing and then all the stores will be closed for the next 6 months.

71

Matt Daws 02.20.06 at 6:57 am

Actually, I still don’t understand. According to some other commentators over at Marginal Revolution, it appears that the first choice should be irrelevant to the OC, so assuming #A is my default choice, the OC is *always*

600 – (cost of #B)

At least this is always consistent… However, given the raging arguments over at M.R., it appears that *any* of the given multiple choice answers can be backed up, if one has an appropriate choice of definition for OC. So I still think the question is rather unfair…

72

Matt Daws 02.20.06 at 7:12 am

Okay, last post for a while, honest. I looked at The Concise Encyclopedia of Economics and found this:

If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can’t spend the money on something else. If your next-best alternative to seeing the movie is reading the book, then the opportunity cost of seeing the movie is the money spent plus the pleasure you forgo by not reading the book.

So, the OC of going to Clapton is the sum of:

0 dollars cost as the ticket is free,
negative of what attending the Dylan concert is, which is 40 dollars, and the enjoyment of Dylan

So a total of -40 dollars and enjoyment of Dylan.

Erm, which isn’t even an option.

So, it seems that to get 10 dollars, I have to assume I’m *making* 10 dollars by spending 40 dollars for something worth 50 dollars.

But by this analysis, am I loosing vast amounts of money by sitting at a computer and typing this, instead of going out and buying lots of discounted goods? I don’t really see how paying less for something than I might be prepared to do so can possibly count as a “gain”, unless I’m already comitted to buying this something anyway.

73

abb1 02.20.06 at 7:19 am

I donâ€™t really see how paying less for something than I might be prepared to do so can possibly count as a â€œgainâ€, unless Iâ€™m already comitted to buying this something anyway.

That’s why they have this phrase there:
On any given day, you would be willing to pay up to \$50 to see Dylan.

74

PersonFromPorlock 02.20.06 at 7:26 am

My image of economists is two of them on Nightline, debating whether the sun rises in the north or sets in the south. This is paradigmatic since it’s (a) pushing for notice (b) wholly out of their field of expertise (c ) a semantic quibble and (d) wrong in either case.

75

abb1 02.20.06 at 7:37 am

wrong in either case

They could be both right – if one of them is on the north pole and the other one on the south pole.

76

John Emerson 02.20.06 at 7:53 am

No such thing as neo-classical economics? Schools of economics are a bad thing? PAE was rightly ignored because they chose a bad name for their movement?

Sounds like an impregnable fortress there.

Even some of the people in the Collander book take some pretty strong hits at orthodox (neo-classical economics), and the Collander people are all willing to be called mainstream (as the broadband people are not).

Analytic philosophers, too, claim that there’s no such thing as analytic philosophy, but just philosophy. And to them the other so-called “schools”, if they can’t be absorbed, are just easily-refuted unsuccessful attempts at philosophy.

Looks like we’re headed to a unanimous consensus in both fields.

77

raj 02.20.06 at 8:05 am

They could be both right â€“ if one of them is on the north pole and the other one on the south pole.

This is incorrect, and I’ll use the North Pole case as an example. (The South Pole case is symmetric.) Exclude the time of year around the Summer Solstice during which the sun is visible through the entire 24-hour day (i.e., there is no period of darkness during the day) and around the Winter Solstice during which the sun is invisible through the entire day (i.e., there is no period of light during the day). During those periods, the sun neither rises nor sets.

During other times of the year, from the perspective of the person at the North Pole, the sun appears to rise from the South East and set in the South East. This is a result of the fact that the North Pole is always north of the trace of the sun over the earth as the earth rotates.

78

abb1 02.20.06 at 8:10 am

But when you’re on the north pole, there’s no south east, everything is south.

79

John Emerson 02.20.06 at 8:26 am

Back to why econ grad students failed the quiz: econ students are famous for their concrete material goals. For a lot of them, econ was probably just a steppingstone to something else, so they learned everything purely by rote, in order to pass tests, without necessarily trying to understand the meaning of the principles taught or their application to reality.

The horrible broad-band economics people say that neoclassical economics is a formalized fossil ideology with no necessary connection to economic reality, but of course you can tell that their wrong about this by the name they chose for themselves.

80

J Thomas 02.20.06 at 9:09 am

Of course economics has no *necessary*connection to reality. But it’s like poetry or mathematics. You can find brilliant intuitive ways to connect it to reality. If your intuitive brilliance is good enough you can use economic theories to find situations where other people are leaving a lot of money on the table that you can pick up.

But it’s no good just applying it by rote. It takes that intuitive brilliance or you’ll get nowhere.

81

abb1 02.20.06 at 9:14 am

If you have intuitive brilliance, you don’t need no freakin economics.

82

J Thomas 02.20.06 at 9:31 am

Abb1, that’s true. But it’s like saying that if you have intuitive brilliance you don’t need poetry or mathematics.

83

John Emerson 02.20.06 at 9:44 am

The critics say that a lot of economics as taught, especially at the introductory levels, is an ideological false front. They’re all economists themselves, and none of them say that there’s no value at all in economics.

84

abb1 02.20.06 at 9:44 am

Nah, actually I agree with what you said there. Like Euclidean geometry – very much abstract, yet very helpful for building a pyramid or something.

85

John Emerson 02.20.06 at 10:10 am

You oughta read the books. Even some of the mainstream critics in the Collander book say that parts of economics, as taught, are simply false. Not just highly abstracted and schematic, but false.

One of the ill-effects of this that they speak of is the production of flocks semi-educated economists by the mediocre schools. They go out into the community with their ideological misinformation and do harm.

86

abb1 02.20.06 at 10:45 am

False in any given abstract universe? Even in the universe where country A produces only cheese and country B only wine and nothing else? Give an example, please.

87

John Emerson 02.20.06 at 10:53 am

Herbert Gintis and other say that the general equilibrium model is not true and that this has been known for years, but that it’s still taught. Gintis is in Colander’s relatively mainstream collection.

I highly recommend the Colander and Fullbrook books. I’m still waiting for the Mirowski book. I’m not an economist myself and often find myself not understanding what’s being said, but these two books somewhat validate my ignorant mistrust of the profession.

88

cm 02.20.06 at 2:29 pm

abb1 (#64): I don’t buy the logic that by paying \$40 for something which I’m prepared to pay \$50 for amounts to exchanging \$40 for \$50. At best it’s exchanging \$40 for \$50 committing to this specific purchase, i.e. the \$50 loses its fungibility, which begs the question whether it is still money we are talking about.

Aside from that, in order to “make” the \$10 at Dylan I have to pony up the \$40 first. But you are right at least in so far as the Dylan concert was defined as “second best” (as an evening time pass anyway), and as such preferrable to e.g. dinner.

89

abb1 02.20.06 at 4:08 pm

\$50 loses its fungibility

Yes, and that’s what I said too. Doesn’t quite work for concerts; makes much more sense with investments and stuff like that – where everything can be translated into dollars and cents.

90

bryan 02.20.06 at 4:53 pm

normally I would need to be paid 20 dollars to spend a night at a Clapton concert.

The mob tells me I can get in the concert for free or have my knees blown off. Not Getting my knees blown off is worth \$200, so I go to the concert.

Okay in this case what is the 20 dollars I would normally need to be paid to agree to spend a night at a Clapton concert accounted as? Surely not opportunity cost.

91

I left for the weekend and missed a bit – so I apologize if my reply is out of date in this fast moving world of the thing they call they internet. Anyway:

After giving that hack Stephen Keen an honest try I’m a bit wary of ‘critiques of mainstream economics’, but since you group’em with Collander I might just risk it.

â€œEven if there really is no such thing as â€œNeoclassical Economicsâ€.â€

“Explain that to the co-editors of the Collander book, who distinguish it from Institutionalist, Austrian, neo-Keynsian, Marxist, and feminist economics. Joan Robertson called it neo-neoclassical, since the neoclassicals were Marshal, et al, and the classicals were Ricardo, et al.”

Well, I certainly didn’t mean to imply that there isn’t such a thing as ‘mainstream economics’, just that this ‘Neoclassical’ term, despite its historical pedigree by now just has essentially become a stand in term for ‘the kind of economics I don’t like’ or ‘the kind of economics that don’t jive with my apriori ideological conclusions’. I.e. the term is at best useless, likely an obfuscating tactic.
As to your list, think about it the other way. Is Matthew Rabin (behavior stuff) a Neo-Classical? Akerlof (Neo-Keynsian)? John Roemer (Marxian)? Them New Institutionalist folks? Many Austrians are out of the mainstream (like the Von Mises Institute folks) but that’s mostly because they prefer to whine about how ignored they are rather then engage in honest discussion or actually try to develop an alternative approach (unlike the folks mentioned above).
By the way, the editor of the Collander books might distinguish out Neo-classical economics but Collander also thinks the term useless.

“Iâ€™m not actually sure that econ is in turmoil, but from these books it seems that it should be. The Collander book is by mainstream people who are trying to convince the profession to meet the challenge.”

Well, I don’t think it’s in any more turmoil then it usually is. But the ‘mainstream’ is very fluid and readily incorporates (appropriates if you wanna be less kind) stuff that a few years back wasn’t mainstream. It’s the normal process of intellectual pursuit.

92

John Quiggin 02.20.06 at 5:52 pm

John E, I only have a limited amount of time, as do most people.

If a group defines itself by the claim that, unlike its opponents, who currently dominate the field, its members don’t suffer from mental illness, I think it’s reasonable to conclude that this group is not worth serious attention.

Obviously, I can guess what the name is meant to imply (opposition to mathematical reasoning, mixed up with criticisms of *homo economicus*), but that kind of criticism has been made many times before, and in a less sophomoric fashion.

93

John Quiggin 02.20.06 at 6:20 pm

Radek, I reviewed Keen’s book here. I found some big problems, but I thought there was some worthwhile stuff there.

94

John Emerson 02.20.06 at 7:31 pm

Radek, Collander may find the term useless, but it appears in the introduction he co-authored. It’s basically a polemical term, and unsurprisingly, those attacked dislike it. Analytic philosophers have similiarly told me that there’s no such thing as analytic philosophy.

That’s certainly a wonderful way to save yourself effort, John, but I’m confident that you don’t apply it evenly, but only to people who seem to be saying bad things about you personally. And who wouldn’t? Perfectly natural!

I’m less confident than you are that you understand the book you’re not going to read, but perhaps the reason why these things have been said many times before is that they’re true.

The group was started by economics students at the Sorbonne, some of whom may actually have been sophomores, and spread to Cambridge and Harvard. They were unimpressed by the stuff they were being taught and staged a revolt, and apparently something came of it.

95

John Emerson 02.20.06 at 7:34 pm

None of them would be neoclassical according to what I said and what the book said, except perhaps Rabin.

96

John Emerson 02.20.06 at 7:38 pm

Beginnin of previosu post:

Is Matthew Rabin (behavior stuff) a Neo-Classical? Akerlof (Neo-Keynsian)? John Roemer (Marxian)? Them New Institutionalist folks? Many Austrians are out of the mainstream (like the Von Mises Institute folks) but thatâ€™s mostly because they prefer to whine about how ignored they are rather then engage in honest discussion or actually try to develop an alternative approach (unlike the folks mentioned above).

97

John Emerson 02.20.06 at 7:46 pm

Herbert Gintis and other say that the general equilibrium model is not true and that this has been known for years, but that itâ€™s still taught. Gintis is in Colanderâ€™s relatively mainstream collection.

Comment?

98

John Quiggin 02.20.06 at 9:24 pm

John, if Rabin, Akerlof, Roemer et al aren’t neoclassical, then neither am I. All of these people would be regarded as “mainstream” though, which I think was Radek’s point.

I’ll have to read the Colander book, to see exactly what Gintis is saying. No-one sensible thinks that the strong results of GE theory hold in reality, though there’s a big range of dispute about how far off they are. This is pretty much the theoretical basis for most disputes within economics between interventionists and free-market types. If Gintis is saying that, despite this, lots of students get taught the strong claims of GE theory, without the qualifications, and that this is a bad thing, I agree. If he’s saying that GE theory shouldn’t be taught at all, I disagree.

I’ve read Mirowski’s book and didn’t get a lot out of it. He has a fair point about “physics envy”, but it was more applicable 50 years ago than today, and even so he goes way over the top with it.

99

John Emerson 02.20.06 at 9:42 pm

John, I never said you were neoclassical. I have no idea what you are. When I first posted I even thought you might not be entirely hostile.

Even in the Collander book, which is moderately dissident or heterodox, there’s a sort of circle-the-wagon insistence on being “mainstream” but not “neo-classical”. Though if there’s no such thing as a neoclassical economist, of course none of you are neoclassical.

One of the points of the Collander collection, and even more so the other one, is that regardless of how open-minded and adventuresome the top guys at the top schools are, it takes decades for new ideas to filter down to the average and below-average schools, with the result that large numbers of miseducated economists are pumped out into the body politic to do their dirt.

And what Gintis says is that the majority of students learn GE without any reservations. Gintis does not believe that the limitations of GE should be an esoteric secret to be revealed only to upper-level students. He thinks that things that are not true should not be taught.

100

“Herbert Gintis and other say that the general equilibrium model is not true and that this has been known for years, but that itâ€™s still taught. Gintis is in Colanderâ€™s relatively mainstream collection.”

Well, general equilibrium, true or not, really isn’t taught except at grad level since there’s no way around many technically hard issues (and all the interesting controversies over whether it is ‘true’ (‘useful’ would be a better criteria) are even more technical). Well, I guess you might see an Edgeworth Box as an undergrad but even then it’s very very watered down.

What does get taught in some macro, is a representative agent type stuff that is supposed to be general equilibrium (but there’s a butt load of assumptions behind it). But from my experience most undergrad macro sticks to Keynesian IS-LM stuff.

101

John Quiggin 02.20.06 at 10:28 pm

I guess I agree with Gintis. It’s better that students not get taught GE at all, than they be taught a simple-minded and wrong version of it.

That’s why I’d prefer that undergraduates get an understanding of opportunity cost and similar basic concepts, rather than being presented with a set of policy prejudices they can neither defend nor refute, which is the effect of being taught GE badly.

102

muzzlehatch 02.20.06 at 10:31 pm

re#66 & 68 I will accede and doff my hat, I now see your point, though I perrrssonally will still stick with my initial choice out of the 1000 000 doors because I trust to my quasi-psychic talents

103

“He thinks that things that are not true should not be taught”

I don’t know the article so this is commentin’ in the dark, but strictly speaking there isn’t anything in ge that “is not true”. Given certain assumptions certain results obtain. Then you get to argue about how strong/meaningful assumptions are.

Also even at the grad level, usually you get two or three core micro courses and there’s a lot (200+ years!) of material to cover. Usually ge is one out of these three courses – which generally is not enough time to go into the subtleties, many of which are very messy.

And anyway, a very large portion of economics these days is empirical work and at least I get a sense that theory, and disputes over theory have taken a back seat to obtainin’ better data, using better estimation methods and dealing with real world data problems.

104

John, as far as Keen goes, I tend to agree with your review but the sheer amount of sophistry and lying-because-you-know-you-can-get-away-with-it-because-your audience-does-not-know-the-subject-and-they’re-predisposed-to-agree-with-you-anyway
just plain ol’ disgusts me.

105

John Emerson 02.20.06 at 10:41 pm

John and Radek: Many of the authors in the Collander book may be fairly close to your opinions, though several seem less benign about the field as a whole than you do.

I still thin that you should read both books, but whatever.

My own animus against economics comes from the fact that whenever I run into a hard-core, bloddthirst, social- Darwinist free-marketer, he invariably has studied economics and believes in it as gospel. I do also run into liberals and moderates, but I don’t get the feeling that the center of balance of the profession is there, and the liberals and moderates seem unwilling to break solidarity with their profession. By and large I think that the political effect of mass teaching of economics has been highly negative.

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Walt Pohl 02.21.06 at 1:06 am

John: That’s a fair-enough point, but the solution (either economists should reveal their esoteric secrets to their lower-level acolytes, or economics should be kept away from weak minds) is rather different from what heterodox economists tend to advocate, which is a rejection of how economics is actually practiced at the research level.

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John Emerson 02.21.06 at 7:55 am

That’s not their sole criticism. And they find a link between the unrealism of some of the theory, and the ideology learned.

More than one author in the Collander book comments on the very slow (decades-long) way in which important theoretical changes and new results filter down to the teaching/ textbook level. This is very odd indeed, because economics is one of the disciplines where students are milked the most efficiently with new textbook editions every two or three years. There are various reasons for this kind of inertia, but ideology (I don’t mean that in a technical sense) is probably one of them.

I haven’t cited anyone from the other book, since it’s been declared here already that those authors not worth bothering with.

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abb1 02.21.06 at 9:56 am

Don’t mess with pros, John.

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John Emerson 02.21.06 at 10:05 am

It’s my specialty, abb1.

I’m working on an analysis of “intellectual rent”, which is what professional monopolies collect by virtue of their monopoly. For example, they can equivocate about the problems with GE.

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Robert 02.21.06 at 10:29 am

What do people think about the Wikipedia article on General Equilibrium?

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“I havenâ€™t cited anyone from the other book, since itâ€™s been declared here already that those authors not worth bothering with.”

never said that. In fact I said it’s probably worth checking out.

“What do people think about the Wikipedia article on General Equilibrium?”

It’s a bit schizo. You can see the different contributor’s different styles and biases.

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John Emerson 02.21.06 at 2:22 pm

I just looked at the Wiki article on “economic rent” and there seems to be controversy about that too, with two different definitions. I haven’t looked at their Israel-Palestine page yet. Wiki shouldn’t be expected to resolve disagreements.

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