Tuesday, January 20, 2009

Plausible Theories

Many times I hear about theories that seem really good, but further examination shows they don't work. There are lots of feedback loops that are hard to see, and so, many times a theory is really a partial derivative, while reality is full of only total derivatives.

For example, young mammals often play, and countless times I have heard the nature show narrator note that such play is practice fighting when the bear cub/lion cub/etc. grows up. But scientists actually tested this theory by recording the frequency of play fights by squirrel monkeys and meerkats, noted their success fighting as an adult, and found no correlation between either the number of play fights as an infant, or the successes at infant play fighting, and the adult fighting prowess. They also found that play fighting does not address key tactics in real fighting. Infants learn from fighting, but mainly things like coordination, how to deal with surprise, and socialization. Thus, at a high enough level of abstraction, it seemed perfectly reasonable theory, but the closer one looked, it was plain wrong. Animal play is not practice for adult fighting, except in some very abstract sense.

So too, the government multiplier, import quotas, unionizing industries, and all sorts of other great top-down ideas. They work in some very hazy, abstract sense. But you factor in all the opportunity costs, the disincentive effects, the costs spread among many to help a few, and they are all worse than doing nothing. Unfortunately, such theories are so consistent with other objectives (read: redistribution), they are really too good to check.

9 comments:

Anonymous said...

That's right. It's not worth the risk of finding out which solutions are effective. Helping the poor might work, and that would only encourage them.

Anonymous said...

i'll be damn if i trust someone can follow meerkats playing and draw a conclusion from there. not that play frequency should be a predictor anyway. maybe some are fast learning. agreed on the macros though.

Anonymous said...

This is the second post along the lines of "Economic Theory is not useful for developing economic policy" or "Economists don't really know anything about the economy".
What's the alternative? The Bush Administration strategy: experts are biased; We need to go with out gut on these things.

Eric Falkenstein said...

Actually, my point is that the data show these efforts do not work, and are counterproductive. I think theory is important, because the invisible hand is the most unintuitive result one can think of, and I think at the macro level, the most powerful theory for evaluating and explaining the efficacy of various measures. Working through the first and second welfare theorems can aid this intuition.

But, people who like redistribution, will simply look at the seen, ignore the unseen (see Bastiat), and say this top-down approach is good for everyone, when it is not.

Anonymous said...

falken, you don't cease to impress me. i guess we'll see how right bastiat was (i'm in that camp) with the outcome of current debacle in US, which is(was) the only true free market in the world. never seen the 2nd effect quantified so far and previous success can be put to various factors like immigration, resources, won the war etc.

Anonymous said...

Eric, I agree with your point in general. Let bad businesses fail. But in this case, the country needs a banking system. So the issue is the best way to fix it without turning it into an inefficient socialist enterprise, and without distorting long term incentives. The economists are the best prepared to lead in thinking about how to tackle those issues. Not lawyers or legislators.

callum said...

@ Anonymous: The US is not a true free market. Free market companies do not get bailed out, they go bankrupt, supply is reduced, an investment opportunity is presented, the failed company is bought out and the stupid management is kicked out.

Anonymous said...

I like it now that Economists need to justify their worth. I would say this is now do or die for the Economics profession as a whole.

Anonymous said...

It is refreshing to see someone referencing Bastiat. I read The Law several months ago for the first time, and it seemed plainly true (and timely).