Congratulations to Dick Thaler on Winning the Nobel Prize!

Someone from at the World Bank wrote to ask what I thought about the Nobel Prize for Dick Thaler. Here’s my reply:

I think it’s terrific that Dick got the prize. He deserves lots of credit for pushing forward the research agenda of behavior economics, and doing so with good cheer, despite the disdain it provoked from many quarters.

He lead the wave of work that followed the pioneering basic scientific insights of Danny Kahneman, Amos Tversky and their many colleagues from psychology. Economists working as part of this second wave told those insights that it was time to grow up, get out of the house, and get a job. They put behavioral economics to work and turned it into “useful knowledge.”

I understand the purely aesthetic appeal of a convincing scientific explanation. To borrow from the title for one of Richard Feynman’s books, there is a “pleasure in finding things out.” The problem is that people can derive aesthetic pleasure from many different types of “explanation.” After all, the problem with the traditional choice model based on conscious utility maximization is not that it is ugly. And, on grounds of mathematical beauty, no economic model can touch a theory of perfect competition grounded in convex duality. The real problem is that these models are show horses, not work horses.

As far as I can tell, the only way to decide when and how to add some messy detail to a scientific explanation is also the way to distinguish the work of scientists from our work of scientologists and their ilk. Scientists are the ones who remain committed to useful knowledge as the only final output that matters. In the context of another example, research trials alone will never win the battle between scientists and the anti-vaxers. The decisive win is the massive reduction in mortality and morbidity that vaccines caused.

To be sure, we have to leave room for early work on knowledge that looks to be potentially useful. But ultimately, scientific knowledge has to do real work. This why Dick’s contributions are so important.

 

Letter from an Aspiring Macroeconomist (with response)

Dear Professor Romer,

I am writing you about your recent working paper The Trouble with Macroeconomics that generated lots of reactions.

I have simple question. I am a graduate student in economics. I am going to begin a PhD program in economics next year. I always loved macro, and I will probably specialize myself in this field. My question is:
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Why It Makes Sense for an M.D. to Lead the World Bank

I lived with a surgeon for 25 years. From the decisions Ginny made, I learned that doctors are better than economists at balancing the costs and benefits of delay.

Economists teach that time is money, but we never specify the exchange rate. If delay costs $x per day per person, the total cost scales with the number of people. In my lifetime, the most important lesson economists have learned is that in countries of all sizes–small ones like Singapore, medium-sized ones like South Korea, large ones like China and India–better policy can lift people out of poverty more quickly than we dared hope. Because a billion people still live in extreme poverty, each day of delay in taking full advantage of this lesson imposes a cost that is staggering.

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Everybody wants progress; nobody wants change

Alain Bertaud once told me, ruefully, that he was part of a failed effort at the World Bank to end the implicit subsidy for car trips created by the Bank’s offer of free employee parking. This proposal generated complaints, but that does not mean that it was a bad idea. If Steve Jobs had followed a strategy of avoiding all complaints, my MacBook Pro would still have an optical disk drive.¬†Examples like these suggest a general lesson about cooperation in large groups:

Everyone wants progress.
Nobody wants change.

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Abstraction vs. Radical Specificity

Someone asked “What if Germany ran Detroit?” This kind of what-if-pigs-could-fly question mixes abstraction and specificity in a way that I do not find helpful. What works for me is iterating back and forth between two extremes — abstraction and radical specificity — and avoiding the middle.

At one extreme, I ask abstract questions such as “Could there be gains from trade in government services like the gains from trade in private services?” Then I consider specific questions such as “Could the new authority that was formed to fix the street lights in Detroit sell its services to other cities?”

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