What economists do

One of the challenges of being an economist is that nobody really knows what you do.  If economics is what economists do, then economists are consultants, corporate toadies, professors, labor union hacks, macroeconomic forecasters, applied mathematicians, financial analysts and so on.

I tend to focus on a much narrower set of activities, the Hayekian sphere of page 76 of The Fatal Conceit:

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

In this definition of economics, the focus is on the complexity of phenomena that are the product of human action but not human design.

David Brooks, in yesterday’s New York Times ($$), attacks a particular kind of economics for failing to be relevant in today’s complex world.  I think he’s attacking a straw social science.  His piece opens:

Once, not that long ago, economics was the queen of the social
sciences. Human beings were assumed to be profit-maximizing creatures,
trending toward reasonableness. As societies grew richer and more
modern, it was assumed, they would become more secular. As people
became better educated, primitive passions like tribalism and
nationalism would fade away and global institutions would rise to take
their place. As communications technology improved, there would be
greater cooperation and understanding. As voters became more educated,
they would become more independent-minded and rational.

Brooks has confused a number of different things here, mainly materialism or maybe Marxism with economics.  Instead of "profit-maximizing," he might have said "calculating creatures always rationally pursuing their self-interest."  In that more accurate definition, he could have allowed for altruism, religion and even tribalism.

Brooks continues:

None of these suppositions turned out to be true. As the world has
become richer and better educated, religion hasn’t withered; it has
become stronger and more fundamentalist. Nationalism and tribalism
haven’t faded away. Instead, transnational institutions like the U.N.
and the European Union are weak and in crisis.

Communications
technology hasn’t brought people closer together; it has led to greater
cultural segmentation, across the world and even within the United
States. Education hasn’t made people moderate and independent-minded.
In the U.S. highly educated voters are more polarized than less
educated voters, and in the Arab world some of the most educated people
are also the most fanatical.

All of this has thrown a certain
sort of materialistic vision into crisis. We now know that global
economic and technological forces do not gradually erode local cultures
and values. Instead, cultures and values shape economic development.
Moreover, as people are empowered by greater wealth and education,
cultural differences become more pronounced, not less, as different
groups chase different visions of the good life, and react in
aggressive ways to perceived slights to their cultural dignity.

But the materialistic vision has never been all there is to economics.  Adam Smith wrote The Theory of Moral Sentiments, a fundamentally anti-materialistic work.  As Brooks acknowledges elsewhere in the piece, economists are increasingly interested in culture and psychology, major interests of many of my colleagues here at GMU.

Economics, which assumes people are basically reasonable and respond
straightforwardly to incentives, is no longer queen of the social
sciences.

Maybe, maybe not.  I’ll agree with Brooks that the narrow, materialistic vision of some economists is often inadequate.  But people do respond to incentives, as Brooks inadvertently proves near the end of his piece.

It turns out that it’s hard to change the destinies of nations and
individuals just by pulling economic levers. Over the past few decades,
America has transferred large amounts of money to Africa to build
factories and spur economic development. None of this has worked. As
the economists Raghuram Rajan and Arvind Subramanian demonstrated,
there is no correlation between aid and growth.

At home, we
spend more money on education than any other nation. We have undertaken
a million experiments to restructure schools and bureaucracies. But
students who lack cultural and social capital because they did not come
from intact, organized families continue to fall further and further
behind — unless they come into contact with some great mentor who can
not only teach, but also change values and behavior.

The failure of foreign aid and educational spending is due to a failure of incentives.  Materialists may think that spending money is the way to achieve particular ends.  But if the incentives for performance are missing, merely spending money without the incentives to spend it wisely will never achieve its objectives.

Brooks is right that economic levers don’t always move the world, but I would substitute the word "financial."  Money isn’t always the most important lever.  As Adam Smith understood along with his modern-day colleagues, money isn’t the only thing that motivates people.

In the middle of the piece, Brooks writes:

It all amounts to this: Events have forced different questions on us.
If the big contest of the 20th century was between planned and free
market economies, the big questions of the next century will be
understanding how cultures change and can be changed, how social and
cultural capital can be nurtured and developed, how destructive
cultural conflict can be turned to healthy cultural competition.

I think economists are going to get better at understanding how cultures change.  But we won’t be very good at figuring out how to change them.  That, I would suggest, is an important application of the earlier quote from Hayek.  But then again, we’ll probably be aware of our limitations.  I’d be worried about the anthropologists.

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