Category: Behavioral Economics

Experimental Economics: What Does it Offer’

The research output of experimental economics has been showing a marked increase in the recent past. This post provides a few insights regarding the works of the experimental economists. As Shyam Sunder writes, there are three streams within experimental economics: (1) macro stream to examine the properties of social structures, (2) micro stream to examine the behavior of individuals, and (3) agent stream to explore the links between the micro and macro phenomena using computer simulations.[Sunder 2007] At the first look, experimental economics seems capable of handling the micro stream as well as the agent stream.

The following image shows how laboratory data is presented for a double auction. (Retrieved from http://veconlab.econ.virginia.edu/htm_small/da_06_small.png )
An Illustration

It is believed that Edward Chamberlin conducted the first experiment in economics. Chamberlin examined market conditions in his classroom in a controlled atmosphere, whose results deviated from the prevalent Walrasian conclusions. The rationale of experimental economics is that theory/models suggest general tendencies among the variables of interest. The strength of the general tendency is not provided by theory. In other words, theory cannot tell us about its explanatory power. This is where experimental economics makes its contribution. Also, this is the reason why one carries out field surveys and why econometricians look for a high R-square.

Initially, experimental economics seemed to be aping the sciences to a large extent. However, after reading Sunder’s account, I am begining to get convinced about its potential in understanding aggregate economic behaviour. Sunder wonders how we can study social beings by completely negating free will ‘ that is, by treating it as a science. The other option is to highlight the heterogeneity of human behaviour and refuse to come up with general tendencies. As he writes:

‘Hence we see the dilemma of social sciences. Do we abandon free will, personal responsibility, and special human identity; and treat humans like other objects of science’ That is, drop the ‘social’ qualifier, and become a plain
vanilla science’ Or, do we drop the ‘science,’ abandon the search for universal laws, embrace human free will and unending variation of behavior, and join the humanities’ Either way, there will be no social science left. Is there a place where we can keep the ‘social’ and the ‘science’ together”

Advances in computer technology assists economists working on aggregate economic variables. This is done by conducting computer simulations. The model can be taken from any theory ‘ Marxian, Walrasian, Ricardian, Keynesian, etc ‘ and specific behavioural rules can be assigned so as to arrive at some conclusions. But what is to be remembered is that, these computer simulations are tools which assist the policy maker and are not substitutes for theory. It must be noted that when assigning behavioural restrictions, we are negating the free will of the individual economic agents. As economists, we are used to making such an assumption ‘ utility maximization, bounded rationality, tit-for-tat strategy, satisficing, reciprocative behaviour are all aspects of an individual’s behaviour.

To conclude, experimental economics offers economics the following benefits. Firstly, it provides data for verifying/falsifying a particular hypothesis. Secondly, through computer simulations, aggregate economic behaviour can be replicated to a limited extent. And lastly, experimental economics provides a strong flavour of science to economics.

Reference

Sunder, Shyam (2007) ‘Determinants of economic interaction: behavior or structure’, Journal of Economic Interaction and Coordination.

The Fellowship of Economics

The essence of Economics or Political Economy as it was called earlier (According to Adam Smith) was to provide a good livelihood for the people and also to bring in money for the state. Nowadays, economics has got lot many divisions and specialities, that I feel the essence is getting compromised.

These are some of the subjects which are closely related with economics.

Anthropology is the science that deals with the origins, physical and cultural development, biological characteristics, and social customs and beliefs of humankind.

Economic anthropology analyses decisions and behaviour of economic agents who are embedded in the networks of social relationships and cultural influences. Economic Anthropology is directly concerned with the most central anthropological issues of human nature, choice, values, and morality. [Thomas 2006]

Geography is defined as the science dealing with the areal differentiation of the earth’s surface, as shown in the character, arrangement, and interrelations over the world of such elements as climate, elevation, soil, vegetation, population, land use, industries, or states, and of the unit areas formed by the complex of these individual elements. [Dictionary.com]

Geography forms an integral part of Environmental Economics, which studies the externalities, both positive and negative, arising out of human activities.

Moreover, natural endowments have a significant correlation to the natural progress of an economy. Studies have shown that nations with abundant natural resources have grown faster.

Geographical factors can lead to poverty also. Jeffrey Sachs, in his book ‘The End of Poverty’ has given an account of this.

Demography, the study of Population draws extensively from the science of geography.

History is the branch of knowledge dealing with past occurrences. Tirthankar Roy, an Economic historian says that Economists engage with history from a desire to make the theory of economic growth more complete and intelligible. Without comprehending the history of Britain during the 1700’s one could never understand what Adam Smith tried to say. Students find Classical theories to be otiose, due to their lack of understanding of history.

Political science or politics seem to have attracted a lot of ire, but with out a proper political institution, there will be no freedom. It is a branch of social science dealing with political institutions and with the principles and conduct of government. It is therefore essential that economic policies can be framed keeping the objectives of the political institution prevailing. ‘The disjuncture between economics and politics in India’s democratic system has also been growing’ says Bimal Jalan in his book ‘The Future of India’.

Psychology is the science that deals with mental processes and behaviour. Theories like consumer preferences, irrational exuberance and specializations like behavioural economics and game theory draws heavily from psychology. Behavioural Economics is the combination of psychology and economics that investigates what happens in markets in which some of the agents display human limitations and complications. [Mullainathan and Thaler]

Sociology is the study of human social behaviour, especially the study of the origins, organization, institutions, and development of human society. Economic sociology has emerged as a separate branch in Economics; Robert Gibbons of MIT defines it as the sociology of economic actors and institutions.

Philosophy is the rational investigation of the truths and principles of being, knowledge, or conduct. J D Sethi, who specializes in Gandhian Economics, said that ‘Science of Economics is in crisis. Indeed, the main reason for the crisis is that modern economics has no philosophy whatsoever’. To understand an Economist’s theories, we ought to know the prevailing philosophy at that time. Moreover, debates were carried out to decide whether Economics was a normative science (based on values) or a positive science (based on empiric).

Thus, it becomes pertinent that the teaching of economics also touches subjects like history, psychology etc so that the student gets a more realistic picture of the event. These days, economics has become a strict discipline with various specializations and one who ventures into one specialization is unaware of the effects of variables which is outside his or her area of interest. I do not know if ‘division of labour’ is applicable in such cases as it tends to distort the real picture. Thus the need arises for a more comprehensive learning of the social sciences.