Monday, January 30, 2006

A Brief History of Freakonomics

by Tom Bozzo

I wish Steven Levitt well (though I wish he'd post the text of his working paper on child safety seats, subject of a controversial NYT column, which has been "coming soon" for several months; I suppose if I were so inclined, I could reach out and ask). I hope that the success of Freakonomics makes everyone want to pay economists lots of money and encourages enough smart students to enter the field that we can actually fill our vacant staff economist position. Still, this Louis Uchitelle lede irritated me in a way that perhaps Jeremy can describe in one of his short short stories:
Taking as a model the research techniques that Steven D. Levitt displays in his best-selling book, "Freakonomics," graduate students in economics are focusing on small insights about the economy rather than broad theories that explain how the overall system works.
News flash! (Woof, ouch!) The fraction of graduate students who work on theories of econo-everything has always been vanishingly small. Still, I'd expect there's a Friedman or Samuelson aspirant or two out there in the assistant professor ranks, just like there are prominent public economists with wide-ranging professional contributions out there among the senior but not super-senior ranks. We just don't know who the future stars will be.

Meanwhile, the article does not want for tendentious sweeping generalizations. Levitt says, "We have lost our optimism that the tools of economics can be used to manage the economy," which might come as a surprise to everyone who might think that the Fed's macroeconomists are optimistic — maybe over-optimistic — about their ability to use the tools of economics to manage the economy.

To whatever extent grad students in the elite departments see themselves as brains-in-vats "explor[ing] the economy without becoming advocates for one solution or another," as Uchitelle puts it, it would be inappropriate to draw the conclusion that the amount of policy advocacy based upon invocations of economic theory is likely to decrease. I actually see it as a bit of a pathology that some academics don't seem to recognize implicit biases in analytical methods, which is if anything reinforced by a view that graduate training is purely in the application of value-free tools.

What Levitt has done, in effect, is to popularize what the vast majority of economists have been doing all along.

Levitt's colleague (and quasi-Nobel laureate) Gary Becker was doing what a sophisticated marketer might have called "freakonomics" when Levitt and I literally were in diapers, if not earlier, through his efforts to explain bits of what one might consider in the province of sociology using neoclassical microeconomics.

Ditto some major figures of the "new" economic history. Some classic works, e.g. Robert William Fogel on the railroads, applied insights from elementary economics (and not even all that well, really) to historical matters that may have been considered more-or-less settled by traditional descriptive — vs. counterfactual — techniques. Economic historians also take the cake, in my view, for devising novel uses of the often extremely limited data that exist. Some works of the new economic history are doubly freakonomic, just to pull one out of a hat, University of Delaware economic historian Farley Grubb's "The Market Evaluation of Criminality: Evidence from the Auction of British Convict Labor in America, 1767-1775," published in the American Economic Review just about five years ago. (*)

Last, if there is an increase in interest in smaller micro topics, there's a simple economic explanation that I'm surprised to see go unmentioned: There are a lot of jobs there, especially outside the academy. (And non-academic employment opportunities support the relatively rich pay for academic economists.) My perception is that corporate macro work has been consolidated in a handful of consultancies, so cut out central bank jobs and the opportunities are in finance (the big money), then various micro- and meso-disciplines, often under the guise of general quantitative economics.

(*) Farley was not randomly chosen, though the paper pretty much was. I knew him a little, back in my Maryland days, for one. For another, his applications of unconventional data sources have made him a relatively rare economist who gets to be embroiled in public debates over his work. I suppose it is not bad, in a way, to have someone care enough about what you're doing to pick a fight over it.
Yeah. And isn't the move towards empirical work more about cheaper costs of computing/improved econometric techniques than what is sexy?
Excellent point, Isaac, perhaps meriting some additional discussion on the main page later.

I might argue that the change is in the nature of the empirical work. Berndt's Practice of Econometrics fit the estimation data sets for a variety of classic empricial studies on a 3.5" floppy. Now, it's cheap both to process large data sets and also to implement fancier econometric methods.
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