The absorbing and expanding social science of economics

The absorbing and expanding social science of economics

Economists are a lucky bunch. Decades of work by those in our discipline have produced arguably the most useful, tractable, and flexible model of human behaviour that the world has ever seen. While other social sciences struggle with measuring personality, separately identifying broad social trends, explaining the evolutionary origins of human sacrifice, and other such bogs, economics is eminently practical. The discipline’s social role in modern life is to provide brass-tacks advice for real-world decision makers making resource allocation decisions under scarcity and other constraints. The material world can’t wait: it looks for answers from economists, and for better or for worse, economists have given them.

The mainstream analytical framework used by economists in crafting their advice has delivered a number of big hits in the policy realm that play again and again, as familiar situations are repeated across time and space. As I have mentioned in other forums, these big hits – crafted from the application of fundamental economic concepts to material realities – underpin our profession’s advice to governments and industry around the world. They include the recognition of gains from trade, leading to our dislike of trade barriers and our promotion of specialization according to comparative advantage; the recognition that competition is good, and that constrained competitive forces can efficiently solve a great many allocation problems; the recognition that governments are the optimal providers of public goods and certain goods with high returns to scale, like national defence, and systems of law and currency; and the recognition that in these and many other settings, material incentives matter. Subsidies and sales work, and isolated market disruptions like price shocks and taxation make people substitute away from some goods and towards others, lessening the blow of such disruptions but also at times creating deadweight losses.

Yet it has long been recognized that the mainstream economic model of atomistic, individualistic agents out to maximize their personal benefit is incomplete as a reckoning of humanity. We’ve seen economists and non-economists alike roll their eyes at the lack of realism in a model that doesn’t immediately recognize altruism, morality, or teamwork as a core part of the human experience. Books like The Why Axis and Nudge have made their authors famous in part due to the shock and awe reaction of readers confronted with the application of economic thinking to the realms of giving, habits, and other phenomena not normally associated with our discipline’s framework.

Some strands of academic writing in the discipline too have attempted to accommodate these supposedly `non-economic’ aspects of behaviour. While some contributions merely aim to demonstrate that predictions of uniform selfishness just don’t hold up (e.g. in the experimental laboratory), more constructive offerings have tried to back-fill the workhorse utility function with socially-derived goop, such as social esteem, preferences for conformity, other-regarding preferences, or warm glows. Such attempts are not wholly satisfactory, but they nonetheless demonstrate the great flexibility of our science. Tell us what the objective function is for the individual economic agent, and away we go: our constrained optimization programs and market-wise analytics will generate optimal choices, along with predicted trading patterns, prices, winners, and losers. Given a minimum set of assumptions about core functions, market structure, information, and decision time lines, the economics machine can spring into action and quickly deliver insights on individuals’ and governments’ optimal behaviour in an uncertain world. What an enviable toolbox we have!

While the signs of interest in broadening the lens of the discipline are encouraging, we have yet to see a holistic accounting within the economist’s paradigm of the myriad human tendencies, traits, and needs that mainstream economics presently leaves out. To try to fil this gap, my colleague Paul Frijters at the University of Queensland and I have been working to translate the `big hits’ of other social sciences – like love, power, and group behaviour – into a language that economists can work with. Rather than just dumping things into the utility function, we are building our understanding of people and societies from the ground up, drawing on the insights of other disciplines as we go. The flexibility of the mainstream economic model means we have a fighting chance of being able one day to then map that understanding into the practical and tractable form required by, and expected of, the economist.

Like any science, economics can only truly grow when its theoretical backbone expands. The basic architecture we have been schooled in has the best chance across all of social science of proving itself strong enough to absorb the greatest discoveries of its sister disciplines, like psychology, sociology, anthropology, and political science. Once these ideas begin to be absorbed, the predictive power of economic models can start to be expanded such that altruism, fairness, love, and other core humanitarian concepts are recognized and allowed to flourish in the mind of the economic agent, driving and constraining his resource allocation decisions as we all know, thanks to introspection, which they do.

A dry and dismal science? Hardly. Economics is the place to be as a social scientist in the future, with an exhilarating plate full of interdisciplinary exchange and discovery ahead of it.