Is the real genius of economics our ability to see things that are impossible to objectively measure? The examples I have in mind are incentives, market failures, groups, power, and corruption. Below, I will point out just how impossible these things are to objectively measure but how easy we as participating humans can spot them. I will argue that it is our ability to ‘see’ these things that is the real cause of the success of economics, not our superior connection to hard data.

1. Incentives. Economists go on and on about incentives and how changes have to be ‘incentive compatible’. Yet incentives come in many shapes in sizes, both monetary and non-monetary. In the economists’ worldview, men and women have different incentives inside the home. Ministers and their constituents have different incentives. Firms and clients have different incentives. Yet, how on earth would you actually measure an incentive? It is damned hard to do. How would you for instance measure the incentives of a minister whose official duty is to do the right thing for Australia? How would you objectively say what the incentive is for a bank manager whose mission statement is one of ‘oneness with the world’? Neither their mission statement nor their list of official duties tells you much about their actual incentives for it is not those that determine whether they will get re-elected or promoted. In order to even start to measure incentives, a statistician would thus have to ignore most of what could be objectively measured as somehow not quite true. Yet, as a human being, incentives are almost childishly easy to observe. We ‘know’ that the baker and the butcher care for their own well-being. We ‘know’ the manager wants to solidify his power and get more sales. We ‘see’ the minister who wants re-election and does his cabinet team’s bidding. We ‘know’ young men by and large want sex. Etc. These incentives are sometimes uncomfortable to note, but very simple to observe. Why are they so simple to observe? Because we can use our introspection to guess the actual wishes of other people: other people are just like us and hence a little bit of honesty about ourselves allows us to immediately see what incentives others have in particular situations. We merely need to ask ourselves what we would find important in someone else’s position. Easy for us as individuals, virtually impossible for the statistician.

Continue reading “Things that are hard to measure but easy to observe”