Random Thought of the Day: Econ Soc vs. Behavioral Econ

Why has behavioral economics been so much more influential in mainstream economics and popular debate than economic sociology? Perhaps this question is too easy, and admits too many good answers, but I wonder if there is something to be learned by asking it. Both subfields/perspectives have come to the fore in the last 30 years (with 1981-1985 being the genesis of the new economic sociology, roughly, and behavioral econ starting perhaps in the late 70s with Kahneman and Tversky). Both position themselves as strong critiques of prevailing economic orthodoxy, and both are grounded in critiques of the neoclassical homo economicus. But reading stories about the failures of recent economic theory to predict or help in the current crisis, and the likely directions forward, it’s clear that behavioral econ will be a big star (for example, Akerlof and Shiller’s new book uses behavioral explanations for the financial crisis). Economic sociology, on the other hand, has not really showed up, in spite of the many works written by economic sociologists of potential relevance, or that look at the crisis head on. We’re just off the radar – too small, or too wacky, or too impenetrable. I’m not sure.

I’m not writing this post to complain about Sociology’s policy irrelevance, but rather to question what makes the two critiques differently influential. One obvious place to look, sayeth my sociological training, is the institutions and actors and resources pushing for each. But I have a nagging feeling that there is something deeper at play here, something to do with the accessibility of arguments about individual rationality vs. those about the social constructions (in various ways) of economic actors. Economists have long had the nagging feeling, sometimes stated sometimes not, that their models of human action are too stripped down and too perfect. Behavioral econ offers a way forward that adds some seeming realism to those models by adding in the most obvious calculative errors, but does not fundamentally criticize an individuals-first world-view. The semi-rational man replaces the rational one, bubbles form and burst, recessions and depressions are explained, and the underlying ontology of the world persists.

Economic sociology, I would argue, claims that the individual is not the building block of society, but rather that individual actors are incomprehensible outside of their networks, and that the individual and society co-constitute each other. That is, like the broader discipline, sociologists argue that individuals are not prior to the social. How exactly we do this varies. Granovetter strongly opposed norm-driven models that replaced the undersocialized economic actor with an oversocialized Parsonian one, whose actions were determined by society’s needs. More recent work, influenced by the Actor-Network tradition in science studies, examines the construction of economic actors through overlapping webs of organizations and technologies, eschewing discussions of “society” entirely for a focus on the local (although a local that can be quite large). Either way, the economic actors of economic sociology are not simply rational agents with trembling hands, but rather a different sort of thing, constructed actors with histories and contexts. That historicity (which is not the opposite of reality! cf. Murphy 2000) challenges dominant liberal notions across American society (at least).

Perhaps this difference can help explain (in addition to all those classic arguments about dollars and prestige and whatnot, although prestige itself is endogenous here) why so many of the same substantive conclusions are reached by behavioral economists and economic sociologists and yet the former have become prominent while the latter remain a bit more underground.

RetroBlogging – John Kenneth Galbraith’s “The New Industrial State” QOTD

Following up on yesterday’s quote from Burnham (1941), we have an amazing quote from Galbraith (1978) on the primacy of economic goals in public policy, and the problems with focusing solely on what is measurable:

[T]extbooks, teachers and economists in high office regularly warn that economic judgments are not the total judgment on life. This warning having been given, economics is then, routinely, made the final test of public policy. The rate of increase in income and output in National Income and Gross National Product, together with the level of employment, remain the all but exclusive measure of social achievement. This is the modern morality. Saint Peter is assumed to ask applicants only what they have done to increase the GNP.

Skipping one paragraph, and with not as punchy a last line, JKG continues:

There is a further advantage in economic goals. The quality of life is subjective and disputable. Cultural and aesthetic progress cannot easily be measured. Who can say for sure what arrangements best allow for the development of individual personality? Who can be certain what advances the total of human happiness? Who can guess how much clean air or uncluttered highways are enjoyed? Gross National Product and the level of unemployment, on the other hand, are objective and measurable. To many it will always seem better to have measurable progress toward the wrong goals than unmeasurable and hence uncertain progress toward the right ones.

I think I could frame my current research project by asking of this quote, “How did this come to be?”

RetroBlogging: Burnham’s “The Managerial Revolution” QOTD

I’m right now working on a project where I’m going through some big mid-20th century economic and political sociology works (e.g. Galbraith, Bell, etc.) to look at how they talk about the separation of ownership and control. This morning’s task is Burnham (1941) The Managerial Revolution. Burnham argues that we must think of management/owners as disaggregated into four groups (technical managers, profit-oriented executives who don’t actually make anything, finance-capitalists and small stockholders with no actual control) who all have different outlooks on life. All of which leads to our retro-sociology quote of the day:

The different things which these different groups do promote in their respective members different attitudes, habits of thought, ideals, ways and methods of solving problems. To put it crudely: the managers tend to think of solving social and political problems as they co-ordinate and organize the actual process of production; the nonmanagerial executives think of society as a price-governed profit-making animal; the finance-capitalists think of problems in terms of what happens in the banks and stock exchanges and security flotations; the little stockholders think of the economy as a mysterious god who, if placated properly, will hand out free gifts to the deserving.

I think the last line is particularly great (and not just because it’s a great, early-ish example of the modern use of the phrase “the economy”).

The Breakdown of the Capital-Labor Accord and Okun’s Law

I’ve been thinking a lot lately about the periodization of recent history and its connection to economic theory. In particular, in economic sociology we talk a lot about the “post-war capital-labor accord” and the golden age of the 1940s-1970s. In these years, inequality went down, unions flourished, civil rights laws were passed along with LBJ’s Great Society programs like Medicare, etc. Corporations saw themselves as not just profit-seeking nexuses-of-contracts but also as institutions with duties to their stakeholders – employees, local community organizations, etc.

Then everything went to hell in the 1970s. Oil shocks, poor economic performance, large increases in foreign competition, an overheated economy created by the meeting of increased social spending and increased military spending, all combined to create massive inflation and other sorts of economic upheaval. The shooting war between labor and big business resumed, as union contracts were blamed for causing inflation and big business began to push for regulatory changes (to fight the hated EPA and OSHA, along with unions) and increased layoffs. Institutional investors, growing rapidly in size in part *because* of the prosperity of the “golden age” (e.g. the massive pension funds like CALPERS and TIAA-CREF), began to demand discipline from corporations unused to having to listen to anyone (cf. Berle and Means 1932, Useem 1996). Changes in financial regulations and institutions made possible the junk bond market and, in turn, a more active market for corporate control – suddenly, large firms that were used to making acquisitions became targets.

The Rise and (Non)Demise of Economics as a Study in the Sociology of Knowledge

This week’s economist has a three part feature on What went wrong with economics?*. The first part discusses in general how financial economics and macroeconomics have both been blamed for helping to create the current economic crisis, failing to see the crisis coming, and failing to provide useful solutions once the crisis hit. The second part examines the history and sate of macroeconomics, focusing on recent debates involving eminent econobloggers Brad DeLong, Paul Krugman, Greg Mankiw and others. Part three traces the history of financial economics, including the efficient markets hypothesis and the various models used to evaluate risky assets. The overall angle of the piece is to ask the title question – what went wrong? – and to speculate about where economics will go from here. In this post I’m going to make a few comments on various parts of the series, and try to use economics as an example to show why the old school sociology of knowledge divisions about knowledge being a mere reflection of the world or a totally independent causal force don’t make a lot of sense, at least when it comes to economics**.

RetroBlogging: Berle and Means (1932) Quote on Motivations

Berle and Means (1932) The Modern Corporation and Private Property is one of those books everyone cites and few people read. So, in parallel to a literature review I’m working on, I decided to read it. I also justified it on the grounds that Gardiner Means was the lead author on a 1939 FDR administration report (“The Structure of the American Economy”) that shows up in my own research. Anyway, it’s a fascinating book about the consequences of the changing nature of ownership of large firms – what does it mean to own something you can’t control and vice versa?

The book has a few threads – first, laying out the evidence that most large firms were no longer controlled* by their owners (the famous “separation of ownership and control”), and second, tracing the history of the corporation in law. The last section of the book lays out three possibilities going forward, one based on the tradition of property law (“the logic of property”, which suggests managers should be disciplined and all profits should accrue to the shareholders), another based on a reading of economic theory (“the logic of profits”, which suggests managers should receive the profits to incentivize their efficient management and shareholders should get only a reasonable return), and a third way that asserts that the fundamental concepts underlying the first two no longer appy.

Berle and Means argue that economics needs to re-assess the concepts handed from Adam Smith through to the contemporary economic theories. For Smith, an enterprise was something small and manageable – a small group of workers and a collection of machinery owned by a single person or small group. The AT&Ts and US Steels of the world don’t make a lot sense in that model, and Berle and Means suggest we start by throwing out an understanding of the corporation as a purely economic tool for small groups to collaborate. Instead, we must think of the corporation as a political entity – an organization that dominates economic life, and a prominent institution for the redistribution of resources on the order of the state. In that context (with probably more lead-up than is needed), Berle and Means suggest that pure profits don’t motivate the large firm CEO the way they do the small shopkeeper:

“Just what motives are effective today, in so far as control is concerned, must be a matter of conjecture. But it is probable that more could be learned regarding them by studying the motives of an Alexander the Great, seeking new worlds to conquer, than by considering the motives of a petty tradesman of the days of Adam Smith.” (p. 308)

A lot has changed since Berle and Means wrote their book, and while their analysis that holds up remarkably well compared to the experiences of the 1940s-1970s (I would argue), the world starts to change in the late 1970s and early 1980s. For one thing, Berle and Means premise their book on the non-existence of a market for corporate control – a market which emerges in earnest in the early 1980s. For another, a new dominant theory of the firm has arisen (agency theory) around a new logic (what I would call “the logic of contracts”) which starts from the premise that the firm-as-institution is a myth – there is nothing but a nexus of contracts. Thus theorizing has had significant consequences of workers, executives, shareholders, etc. For the best review of this turn, see Jerry Davis’ Managed by the Markets. Anyway, today I’m going to be thinking about what this new model of the firm does to Berle and Means’ insistence that we think of firms as political, and managers as motivated in particular, power-oriented ways.

* As Mizruchi (2004) notes in an excellent review of the book and its impact on Sociology, control for Berle and Means is operationalized as the power to appoint the board of directors who are assumed to manage the firm. Later work in the corporate governance tradition assumes the board are not managers, but rather the voice of owners or the pawns of CEOs who actually run things, and this assumption leads to a misreading of Berle and Means.

Postmodern Economists, Empiricist Sociologists? The Problem of Unobservables

A few days ago, I ran into one of my favorite economics PhD students at my favorite Coffee Shoppe. When I first started meeting the economics PhD students here at Michigan (through the first-year econometrics sequence), I was surprised by how… normal they all seemed. They were interested in economics, but they were not “market fundamentalists” or die-hard Hayekian libertarians. For example, they by-and-large seemed to agree that development economics had failed the poorer parts of the world over the last few decades, in part due to its own hubris. We didn’t agree on everything, but we had a lot of common ground. I began to wonder if the arrogant, imperialist economist was a myth, at least among Michigan students (who tend to focus on labor and development, and less so on micro-theory, for example).

Then I met this particular grad student – call her L. The first time I had a conversation with her came during a discussion of precisely the role of economics in development. Before class one day, she was arguing with another student that it was important for economists not to know too much about the countries they were working in – that it would be at best worthless and at worst outright harmful. The job of the economist was to bring the Theory and let local experts worry about the quirky details of the specific place. I wish I’d had a tape recorder!

When I ran into L this past week, though, our conversation was not about development but rather the role of unobservables in theoretical and empirical work. She was reading about factor analysis, and asked me what I thought about it, and I replied something cheeky about economics being a shockingly postmodern discipline* in that they were quite comfortable analyzing the world in terms of, and coming up with measures of, unobservable quantities (the classic example is apparently “effort” in labor studies). Sociology is not free of this habit – and I’m not particularly opposed to it – but I think it’s interesting how crucial unobservable concepts are to economic theory and yet how ruthlessly positivist the rhetoric surrounding economic knowledge can be. Leave “culture” to the lesser mortals, we economists deal with cold, hard rational money and resources. I’m exaggerating, of course, but I think there might be a significant grain of truth there.

A classic example of this kind of problem is Harison White’s (1981) Where Do Markets Come From?. White rejects existing economic explanations for the origins of stable markets as being impossible because they require actors acting on knowledge they cannot have, e.g.“Firms can observe only volumes and payments, not qualities or their valuations…” (p. 520) White then generates different circumstances under which firms’ mutual observations of each other, and knowledge of their own internal cost structures, leads to different possible stable markets. It’s a very dense model I don’t claim to fully understand, but one of the central distinguishing claims White makes is that he can explain markets without reference to actors acting on unobservables.

A similar story popped up in the literature I’m currently knee-deep in concerning the rise of agency theory and “shareholder value” as a logic/conception of control/model of the firm/etc: the problem of profit. In an important sense, there are two very different kinds of profit discussed in the academic and business literature, economic profit and accounting profit. Accounting profit shows up in balance sheets and refers to the money left over after paying expenses. It’s observable – and manipulable, but different from what economists are talking about. Here’s Froud et al. (2000):

“[E]conomic profit is an unobservable concept of mainly theoretical interest to economists, whereas accounting profit is an observable magnitude of interest not only to companies themselves but to those who make economic decisions to contract with the firm and to those who comment on corporate performance.” (777)

In an excellent paper in a similar vein, Espeland and Hirsch (1990) give numerous examples of the kinds of manipulations possible of accounting profits that, they argue, made possible the conglomerates of the 1960s. Especially popular tricks allowed firms to count the earnings of acquired firms retroactively, thus increasing the apparent profitability of the firm post-merger (I don’t want to butcher the details, go look at the paper if you are curious). I’m not so interested in overt frauds – a la Enron – as the general problem of needing to make choices to end up with a balance sheet that lists a certain amount of profit. Even well-intentioned accountants not trying to defraud anyone, following generally accepted practices, make choices that in turn define the observed (accounting) profits. And on the basis of those observed figures, business decisions are made (by investors, executives, etc.).

So, where does this all get us? I’m not entirely sure, but I’m enjoying thinking through these issues – how do you study decision-making? Is it reasonable to say that (economic) sociology has focused more on the kinds of tools available to the people making decisions while economics has focused narrowly on more abstract, and unobservable, constructs?

Alright, back to writing.

* If I recall, Lyotard talks about game theory is a great example of a postmodern science concerned with narratives and possible worlds.

Another Cause of the Mortgage Crisis: The Consumer Price Index!

One of my favorite things about reading a good book is rummaging through its citations to look for more good books. It’s like paleo-wikipedia. Today’s find, from Jerry Davis’s last chapter in Managed by the Markets, is this interesting article from Harper’s on manipulations of macroeconomic statistics by Kevin Phillips. Much of the piece recounts interesting and politically salient examples of how technical changes in the calculation of key macroeconomic indicators – GDP, CPI (which tries to measure inflation), and the unemployment rate – led to “polyanna creep”. That is, successive administrations pushed the statistics to always make the economy look better, such that compared to 25 years earlier, the statistics of the 2000s reported inflation and unemployment as being far lower than they otherwise would have been.

I have a lengthier take on the whole problem – which hopefully may someday be part of an article or dissertation chapter – involving the idea of technopolitics, and the problem with forgetting that statistics are always everywhere political tools and never technical measures of an objective underlying reality, but for this quick post I just want to highlight an interesting connection between measurements of inflation the mortgage crisis. So, story part I goes back to the Reagan administration and changes made in the CPI that helped lower interest rates:

In 1983, under the Reagan Administration, inflation was further finagled when the Bureau of Labor Statistics decided that housing, too, was overstating the Consumer Price Index; the BLS substituted an entirely different “Owner Equivalent Rent” measurement, based on what a homeowner might get for renting his or her house. This methodology, controversial at the time but still in place today, simply sidestepped what was happening in the real world of homeowner costs.

But, as we know from (good citation needed), rental prices and home prices diverged fairly dramatically in the past few years. That’s one of the signs we missed in the whole housing price bubble. Because the house price wasn’t in the CPI any more, the measure was lower than it would have been and thus interest rates were lower, which in turn fueled the bubble, as Phillips notes (citing a law professor):

As Robert Hardaway, a professor at the University of Denver, pointed out last September [2007], the subprime lending crisis “can be directly traced back to the [1983] BLS decision to exclude the price of housing from the CPI. . . . With the illusion of low inflation inducing lenders to offer 6 percent loans, not only has speculation run rampant on the expectations of ever-rising home prices, but home buyers by the millions have been tricked into buying homes even though they only qualified for the teaser rates.”

The Boundaries of “Economic”

The New York Review of Books has an excellent review of Akerlof and Shiller’s recent book Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism here. As a warning, I have not yet read Animal Spirits. My favorite part of the review concerns Akerlof and Shiller’s treatment of economic vs. noneconomic motives (and rational vs. irrational responses). I’m going to quote a big section of the review because I think it says cleanly something I’ve been saying messily for years, and which I’ve been trying to find better ways to say. First, the review (by Benjamin Friedman) quotes the book at length:

Picture a square divided into four boxes, denoting motives that are economic or noneconomic and responses that are rational or irrational. The current model fills only the upper left-hand box; it answers the question: How does the economy behave if people only have economic motives, and if they respond to them rationally? But that leads immediately to three more questions, corresponding to the three blank boxes…. We believe that the answers to the most important questions regarding how the macroeconomy behaves and what we ought to do when it misbehaves lie largely (though not exclusively) within those three blank boxes.

Friedman then goes on to problematize this fourfould table*:

One of the inevitable difficulties with this kind of argument is that it depends so much on just how words are used. What is the difference between an economic and a noneconomic motive? If I buy a new car because I like its styling and good gas mileage, that’s presumably an economic motive. What if it’s a hybrid and part of my reason for buying it is that I value the “story” of my doing my bit to help slow global warming? If a business owner provides scholarships for his employees’ children, is his motive to treat them fairly for fairness’ sake or to foster their loyalty and thereby improve their productivity?

The answer, in the end, is that an “economic” motive is whatever economists include in their theories of how people behave. And since different economists are always proposing different theories, what constitutes an “economic” motive can differ from one theory, and one economist, to another. Since at any particular time there are dominant theories, there is some coherence to what people would understand as an “economic” motive; and so the point Akerlof and Shiller are trying to make here is far from empty. But it is more elusive than they suggest. The distinction between what’s “rational” and what’s not is, if anything, even more fraught. [Emphasis mine.]

If you’re Callon, that sounds a lot like “Economists frame the economic”. Alternatively, if you’re more into Gieryn, economist do boundary work around the economic. Either way, I think Friedman has given an excellent and jargon-free description of both the ways in which economists construct the economic and why challenging those constructions is meaningful even though they are, in some sense, arbitrary. In other words, just because “X is socially constructed” does not mean it’s pointless to argue that “A is X” or “A is not X”. Rather, that’s why such an argument is meaningful.

The question Friedman does not go on to ask – and which may be somewhat utopic to even bother pondering – is whether or not the categories of “economic” and “rational” have “shed more heat than light”. Fabio recently asked over at OrgTheory, are there other foundations for economics that might make more sense than the dominant model based on (rational, economic) choice. Perhaps another way of asking this question is, are there fruitful, alternative ways of conceptualizing what “economic” and “rational” mean? Or is there a way of getting at similar problems (of the distribution of scarce things, the dynamics of making and trading things, etc.) using a wholly different framework, that eschews “economic” and “rational” entirely? For example, I think the move to satisficing over maximizing (Fabio’s first suggestion) is a redefinition of rational but not of economic.

Alright, back to Polanyi…

* I wonder how many published papers and essays consist of making and then problematizing such tables. Many, if my theory classes are any guide.

Markets Are Politics vs. Markets Have Politics

A couple days ago, I stumbled upon an excellent article by economic sociologist and blogger Peter Levin about markets and culture. Levin digs into the contrast between the “markets have culture” and the “markets are culture” positions at the intersection of economic and cultural sociology. The debate had not made much sense to me when I first ran across it studying for prelims, but Levin’s explanation crystallized the differences and offered two nice paths to reconcile them. Briefly, Levin shows how one set of authors look at the way culture constitutes markets in the first place by fixing the kinds of objects and actors involved (through commodification, commensuration, etc.), while another set looks at the social and cultural influences within functioning, relatively stable markets (e.g. the Granovetterian tradition in economic sociology). The first shows how culture constitutes markets, the second shows how culture acts on existing markets in a complementary way to purely economic forces.

So what does this have to do with politics? I think we can usefully analogize the two. Authors looking at the intersection of political sociology and economic sociology have analyzed, on the one hand, how markets are politics, and, on the other, how markets have politics. The markets are politics approach you can associate with the like of Karl Polanyi, who shows that the constitution of markets is political all the way down. The economy is not, and can never be, disembedded from the social world in general, and from the state in particular. Laissez-faire was planned. Etc. The kind of politics referred to here is often macro, state-centered politics, but also can be the little, everyday sorts of politics you might associate with James Scott, or, even cooler, the subtle networks of power of Michel Foucault. Markets are politics because they act on our actions, defining our possibilities and our spaces of possible interaction. So the markets are politics approach covers the big P historical politics of states and the little p politics of the everyday. What’s missing is the middle level – overt, but not state-centered politics.

And that’s where the markets have politics approach comes in. This style, perhaps mostly cleanly seen in recent work on the intersections of social movements and markets such as Brayden King’s stuff, focuses on organized, public politics aimed at markets or market actors – a boycott, or a buycott, or a campaign to push for a certification like Fair Trade or Organic. The markets have politics approach looks at meso-level politics and how they influence markets.

What do you think?