180. "Don't Bash Economics--Blend It" The Washington Post, (September 25, 1988). Reprinted in Sunday News Journal, Wilmington, (October 2, 1989).
Economist-bashing is a fundamentally dishonest activity. Executives, government officials, intellectuals make cracks about yet another failure of the dismal science only to heed economists’ advice the next day; indeed, pay for it. There is a better way. Blend economics with heavy doses of psychology and sociology to create a new science the recognizes more of the complexities of the real world: socio-economics.
Take the current consensus about deficits. Economists urge rapid reduction of the federal deficit to reduce consumption. This, they say, will release resources to domestic investment, thereby stimulating exports. It would also help both to reduce our need for foreign borrowing and maintain our credibility overseas (otherwise foreign investors will stop financing our deficit, drive the dollar down and force a recession).
This policy is not going to work unless a major socio-psychological factor, stickiness, is taken into account. Economists are correct to assume that consumption can be cut quickly, but significantly expanding exports and investment takes years. Executives do not jump to modify their plans because of changes in economic policy; there have been too many zig-zags in the past. And even if plans are changed, it takes years to design, build and equip a new plant.
The same reasoning holds for learning to work foreign markets - many of the countries we might sell to have deeply embedded customs - not to mention internal barriers to the distribution and sale of foreign goods - that would take years to penetrate. Hence, the likely result of a major cut in U.S. consumption in 1989 - late in a business cycle - is a downturn in domestic production and, thus, a recession - followed by a larger domestic deficit and only a temporary reduction in the trade deficit (lower imports until the recession is over).
What would a socio-economist do instead? Reduce the domestic deficit slowly, decreasing consumption only to the extent that exports and investment pick up. If desired, try to reduce stickiness through special incentives to export and invest (e.g. a consumption tax or adjusting taxes on long-term capital gains to take account of inflation.) And, if possible, introduce an iron-clad, multiple year commitment to reduce the deficit, thereby encouraging executives to modify their plans.
Is there any reason to suggest that socio-economists will do better than economists in their prescriptions for 1989 and beyond? Predictions are the ultimate, toughest test of a science. Let’s look at the recent record.
After the October stock market crash, nine out of 10 economists predicted a recession to follow in short order, because consumers, feeling poorer as a result of the sudden diminution of their paper wealth, would scale back buying. In a socio-economic prediction, published on Jan. 3, (while the “recession consensus” was still widely held), I argued that, on the basis of several psychological studies, there would be no such effect. Briefly, I used data from other researchers indicating that people learn from experience much more slowly than is generally believed. Evidence from experiments indicated that it would take several crashes to have the effect that economists predicted would occur on the basis of one. Investors clearly have treated the October crash, so far, as an isolated incident and the economy has gotten stronger and stronger.
Other successes in socio-economics include studies done at universities around the country and in Europe on a variety of subjects of current interest. For example: research linking the rate at which people conserve energy not only to changes in energy prices but also to changes in people’s beliefs (e.g., do people hold that they help their country by consuming less energy?); studies showing that how much people cheat on their taxes is affected not only by the tax level but also by whether or not they think the burden is fairly distributed; and studies (these have been less successful) that tie savings levels partly to beliefs about the “sinfulness” of being in debt and not mainly (as economists tend to assume) to the desire to save for one’s old age.
While socio-economics is a young science, its basic approach is far more realistic that the dominant neoclassical economics on three fundamental points:
Socio-economics assumes people have conflicting goals, rather than neatly ordered preferences. This helps explain why their behavior swings and zig-zags rather than unfolds neatly. (Witness the current swing in feelings about the role of the state; after a decade of reaction against government intervention, see, next, a call for some-regulation.)
Socio-economics recognizes the role of values and emotions in decision-making, rather than treating decisions as a matter of knowledge and analysis. It takes explicit account of how and why impulses, habits and culture significantly influence behavior - from what people buy to how executives make decisions.
Finally, socio-economics sees each person as a member of multiple communities rather than as a free-standing individual, which explains why people’s work habits, tastes and values are affected so deeply by various social movements and not only by relative prices. For example, see the very considerable effect of the health and fitness movement on the use of alcohol and cigarettes.
Economists may respond that their concepts take account of all these factors, as, for example, when they employ “utility functions” in studying individual behavior. But economists do not try to distinguish among the sources of these varying preferences which we need to understand if we are to form effective policies.
Socio-economics has a long way to go but it is already giving neoclassical economics the kind of competition its theory calls for; and, many economists are reacting to socio-economists with defensive resistance - just as socio-economics would predict.