Ross Gittins, the economics editor of the Sydney Morning Herald, yesterday threw a fit; you can read it here. Basically arguing that economists are hopelessly committed to something he labels the “’neo-classical’ model”, he claims that
“This conventional economics reduces all economic activity to that which happens within markets. It further narrows the operation of markets to the setting of prices, assuming movements in relative prices are the primary thing influencing the behaviour of producers and consumers.
It thus abstracts from the role of ‘institutions’ – be they organisations, laws or conventions – in influencing market behaviour, so often leads economists to make policy recommendations that prove seriously misguided.”
These are astonishing claims; somehow Gittins seems to have missed the emergence of (non-cooperative) game theory of the eductive and evolutive kind, modern Industrial Organization (including organizational economics and contract theory as well as corporate finance as encoded in Tirole’s 2006 book), the law and economics movement, modern institutional economics, (market and mechanism) design economics, experimental economics, and behavioural economics. As a matter of fact, there are literally thousands of published articles, and consulting reports for governments and various government bodies, that have been written on various economic aspects of organizations, laws, regulations, and, yes, conventions. There are now even high-quality journals dedicated explicitly – qua title – to those areas of research. In fact, most of these topics are being taught at better Australian universities in their undergraduate program. That’s because the subtle influence of institutional details – for example in various matching mechanism and other market and mechanism design problems (e.g., here for an example of a prominent contributor and likely future Nobel Prize laureate and his work and here for an example of another prominent contributor who should, arguably, have received the Nobel Prize together with Smith and Kahneman a few years back already and still might) — is widely acknowledged.
That’s also why social, and anti-social, preferences have become a veritable cottage industry, as has a related literature on altruistic punishment (Google currently lists under “altruistic punishment” more than 3,500 scholarly articles.)
And, of course, economists have for a long time, and famously, been attacked for their “imperialism”, i.e., their attempts to analyze other than market phenomena. (“Economics imperialism” features 500 Google hits.)
The “’neo-classical’ model”, truth be told, has long been superseded by a wide and ever increasing variety, and diversity, of methods and models.
Yet, it does not mean that more standard game-theoretic models (probably to Gittins’s mind part of the neo-classical model world) are not useful. Somewhat ironically, his discussion of Ostroem’s work, and the claims that Gittins makes about the originality of her work, illustrates that point.
“For a good example of the way different analytical models can draw different conclusions about the same problem, consider an old economists’ favourite: the ’tragedy of the commons’.
Because no one owned the common area, no one had an economic incentive to look after it. Indeed, each individual had an incentive to get in and use as much of it as possible, as quickly as possible, before other individuals used it up. So what was everyone’s property was actually no one’s property – and that was the essence of the problem.
Many economists thought it obvious that the solution was to allocate private property rights over the commons.
Neat, eh? Of course, there were also some who saw the solution as having the government take over the common property, maintain it and allocate its use on some fair basis.”
Gittins then goes on saying that recent Nobel prize laureate Elinor Ostrom
“devoted much of her career to combing the world looking for examples where people had developed ways of regulating their use of common resources without resort to either private property rights or government intervention.”
Her excursions were indeed successful, something that would not even have surprised Adam Smith who wrote, after all, extensively about the emergence of languages, moral sentiments, and institutional regulations (and their abuse) .
Ostrom found, that “(i)n all these cases people drew up sensible rules for sharing the use of the resource and combined to perform regular repairs. People who broke the rules were fined or eventually excluded.”
Well, that is exactly what standard “neo-classical” game theory, with its heroic common knowledge and rationality assumptions, would suggest, no? The people living in mountain villages in Switzerland and Japan, and fisheries in Maine and Indonesia, and similar repeated-game situations might be able to reach other equilibria in social-dilemma situations than those in one-off situations exactly because they have punishment options of various kinds. That’s the kind of stuff – the issue of “reputational enforcement” (Google lists more than 1,500 scholarly articles on it) — now routinely taught in undergraduate courses. And, yes, Adam Smith understood reputational enforcement exceedingly well, too.
It is simply nonsense to argue:
“Few economists had heard of [Ostrom], or her model-busting work.Why had this solution to the problem never been considered by economists? Because of their model’s implicit assumption that we only ever act as individuals, never collectively. We compete against each other, but we never co-operate to solve mutual problems.”
No, no, no. This is what game theory is all about: individual actors inter-acting (or, acting collectively). There are well defined conditions, well understood by most modern economists, under which interacting optimizing individual actors co-operate. There are also good reasons why proponents of the Nash program (which postulated, for the sake of robust implementation, that cooperative solutions be grounded in non-cooperative assumptions) have belaboured for the last five decades that very point, with considerable success since non-cooperative game theory today is the only game in town that matters and that, incidentally, is the heart and soul of theorizing about reputational enforcement. And has been that for at least three decades, as demonstrated by the classic work in the early 1980’s by people such as Klein and Leffler and Shapiro.
That the economics editor of one of Australia’s finer newspapers is that uninformed about modern economic theory is bad enough. That he has no qualms to regurgitate the same old tired misperceptions about economists, and the alleged false policy advice they give, is appalling. For all I can see, Gittins’s poorly informed opinion piece reflects more on his ignorance than the stupidity of economists currently working in Australia. At least not economists working in academia.