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August 06, 2007

A Taxonomy of Economists

Dani Rodrik breaks down the two types of economists:

I call them "first-best economists" and "second-best economists." Here is my guide to them.

You can tell what kind of an economist someone is by the nature of the response s/he offers when confronted with a policy issue. The gut instinct of the members of the first group is to apply a simple supply-demand framework to the question at hand. In this world, every tax has an economic deadweight loss, every restriction on individual behavior reduces the size of the economic pie, distribution and efficiency can be neatly separated, market failures are presumed non-existent unless proved otherwise (and to be addressed only by the appropriate Pigovian tax or subsidy), people are rational and forward-looking to the first order of approximation, demand curves always slope down (and supply curves up), and general-equilibrium interactions do not overturn partial-equilibrium logic. The First Fundamental Theorem of Welfare Economics is proof that unfettered markets work best. No matter how technical, complex, and full of surprises these economists' own research might be, their take on the issues of the day are driven by a straightforward, almost knee-jerk logic.

Those in the second group are inclined to see all kinds of complications, which make the textbook answers inappropriate. In their world, the economy is full of market imperfections (going well beyond environmental spillovers), distribution and efficiency cannot be neatly separated, people do not always behave rationally and they over-discount the future, some otherwise undesirable policy interventions can generate positive outcomes, and general-equilibrium complications render partial-equilibrium reasoning suspect. The First Fundamental Theorem of Welfare Economics is proof, in view of its long list of prerequisites, that market outcome can be improved by well-designed interventions. Since they have given up on the textbook model, members of this group have an almost-infinite variety of "models" to choose from as they think of public-policy issues.

That's a useful taxonomy, actually, and it cuts across ideological lines. Rodrik identifies not only libertarians like Greg Mankiw, but left-of-center types like Brad DeLong, as first-best economists. Folks like Paul Krugman, Joe Stiglitz, and the EPI-types are second-best economists. So far as dabblers go, most of my libertarian friends are first-best types. Im a second-best types. And this isn't surprising. As Rodrik puts it, "these disagreements are often grounded not in economics per se, but in strongly held prior views about the world in which we live in." Of course, we all think our views are grounded in economics and evidence, but which evidence you find most compelling, and which assumptions you're willing to make (can consumers be rational and wise health care purchasers), matter greatly.

August 6, 2007 in Economics | Permalink


can consumers be rational and wise health care purchasers

Don't know if this was intentionally/unintentionally directed at me or not based on the prior thread, but if so, that would be an oversimplification of my position on consumer-directed health care. Your views on targeted first-dollar cost-sharing require consumers to be rational/wise health care purchasers to a certain degree. I'm for similar targeting but probably on a greater scale, for example, higher co-pays for less cost-effective treatments wouldn't prevent access the way a government cost-effectiveness agency (e.g. NICE) does, but also doesn't leave the decision in the hands solely of the consumer. Some judgment has been made to put it in the higher co-pay category and it encourages the patient to ask the really important question-- "Hey doc, this has a $x co-pay, does this really make sense for me?" Its a doctor-patient decision, not a reliance solely on the consumer.

Posted by: wisewon | Aug 6, 2007 5:17:00 PM

I think, though, that this taxonomy breaks down when it comes to economics as it gets reported to us unwashed masses. Generally, the approach is very much an Econ 101 version of the "first best" version (as Prof. Atrios has mentioned). However, it's amazing to me how, when things like drugs, immigration or what not can be explained in simple supply/demand terms, suddenly the first-besters of the media become blind to even the first-best and turn into "zero-besters" ... or would it be "third-besters".

Posted by: DAS | Aug 6, 2007 5:18:16 PM

Wisewon -- It's not targeted at anyone in particular. So far as it does have a target, tho, it's Michael Cannon and other libertarian health types.

Posted by: Ezra | Aug 6, 2007 5:35:46 PM

What would you call people who believe that markets are often highly imperfect, and that government is alos often highly imperfect, and that both claims of market efficiency and claims of government ability to improve upon market outcomes should be treated with skepticism?

Worst-case-scenario economists?

Posted by: Julian Elson | Aug 6, 2007 6:29:25 PM

"Since they have given up on the textbook model, members of this group have an almost-infinite variety of "models" to choose from as they think of public-policy issues."

And Rodrik identifies the flaw in 2nd best economists. With an infinite variety of models, they justify any particular policy while merely giving an appearance of scientific objectivity.

Posted by: bob mcmanus | Aug 6, 2007 7:35:28 PM

bob mcmanus -- that is not the case. Many of us who would put ourselves in the second best group would argue that, since models often offer us no unambiguous predictions a priori, we should look to empirical evidence to decide what policies to follow. And often, though not always, the empirical evidence supports our policy preferences.

And of course, even the empirical evidence is not the ultimate arbiter of what policy we should follow. The empirical evidence may be able to tell us what is the most efficient policy, but generally it has little to say about what policies are more fair, just, and equitable. And those moral value judgments about fairness and social justice are ultimately about what these debates are about.

I happen to think the second best economists tend to be a lot more intellectually honest than the first bests. It's the first best group which is far more likely to "justify any particular policy while merely giving an appearance of scientific objectivity" -- because often as not the first bests don't even bother to look beyond the models towards the empirical evidence.

And they tend to fetishize efficiency over equity without ever admitting that they are doing so and that these questions ultimately come down value judgments, not scientific judgments.

Posted by: Kathy G. | Aug 6, 2007 8:27:10 PM

Kathy: I am not sure how judgemental Rodrik was intending his post, (he did put the 2nd paragraph "model" in scare quotes) and certainly don't want to start any orthodox/heterodox arguments. The argument just seemed one-sided here, and entirely too flattering. Ezra, and yourself, should perhaps look for the flaws, fallacies, and weaknesses of "2nd best economics" rather than just righteously proclaiming your intellectual honesty and empiricism.

My own attitude is that there ain't no science without a Kuhnian paradigm, no politics without an ideology. And the High Pharisees of Orthodoxy probably think they are defending something a little larger than their own sinecures.

I should go to Thoma's and get Krugman's passionate defense of the Law of Comparative Advantage and his defense of mathematical models for those who would put him in their own little club just because they like him.

Posted by: bob mcmanus | Aug 6, 2007 9:03:05 PM

"I happen to think the second best economists tend to be a lot more intellectually honest than the first bests."

of course you do; you put your self in that group.

Posted by: hmmmm | Aug 6, 2007 11:25:53 PM

I was wrong to say the second bests are more intellectually honest, and I apologize for that. It's not true, because I think the first bests (the good ones, anyway) are generally pretty honest, given their paradigm (which I think is seriously flawed).

But I do think that what the empirical findings have to say about a subject are extremely relevant, even when (as is sometimes the case) they're not entirely clear. And the problem with the first bests is that they tend to be far more enamored with the theory than the empirical results.

Also, I'm by no means discounting the value of mathematical models. They're important, especially the ones that certain incorporate real-world conditions and institutions, which too many models unfortunately ignore.

Though the problem with modeling, of course, is that usually the more complicated the model is, the less clear the predictions are.

Krugman is a strong believer in mathematical modeling, but I once heard him say that the problem is that economists have not figured out a way to model power. I thought that was very deep, and true.

Posted by: Kathy G. | Aug 7, 2007 10:17:46 AM

You have to be an economist before you can be either.

Posted by: Alex | Aug 7, 2007 2:13:25 PM

Kettle of fish

Posted by: SKYLAR | Nov 28, 2007 3:51:57 PM

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