THE BIZOP NEWS

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There is a trite view of economics gaining some currency because of the alleged failure of the rational choice model's connection with our current financial debacle.

"Economists like to model human behavior with equations" and the rational-actor theory lets them, said University of Kansas social psychologist Chris Crandall. "If you can't write an equation to describe what people will do, well then, what is it that you do as an economist?"

While I am not an economist, I have a fairly healthy respsect for what they can do, and do well.

Here are some simple examples, which show only some of the breadth of what economists think about, when they aren't writing "equations to describe what people will do."

Al Roth designs markets.  Yes, he designs them, by consturcting rules for auctions, matching institutions, and other devices which match supply and demand in a reasonable way.  Markets would not have to be designed if there was the ubiquitous invisible hand organizing them.

Brandeburger and Nalebuff maintain a book website on Co-opetition, examples of business and social strategies which require both coordination and competition.  Here is a quote from their website:

Game theory sounds tailor-made for the analysis of business strategy.

But, historically, there's been an obstacle preventing the world of business from embracing game theory. The problem is that academics and businesspeople speak two different languages: equations versus experience. Many businesspeople have heard of game theory and suspect that it's a potentially powerful tool.

But all the mathematics can be baffling and stops people from connecting the theory to practice.

At the same time, game theorists are often unfamiliar with business practice, and some of their theories don't capture reality.

Our experiences in teaching, research, and consulting suggest that communication between the worlds of game theory and business practice is both possible and valuable.

This book brings theory and practice together."

Vernon Smith's Interdiscplinary Center for Economic Science

"facilitates the application of laboratory methods to general economic research and education, and, in the future, developing other potential new subfields of economics.

One focus is electronic commerce and information economics. Another examines the evolving process of exchange and specialization. 

This research area is being developed by Vernon Smith and Bart Wilson.

ICES also fosters basic research in experimental methods in business and economics such as the investigation of investor overreaction and price bubbles in asset markets."  

(Vernon Smith is no longer at George Mason.)

Finally, Jon Elster a sophisticated critic of the over use of rational choice theory says:

"Thus a quite minimal theory of rational choice seems essential to me. And my favourite example of the application of a minimalist but very fertile theory of rational choice is Thomas Schelling's idea in his attempt to explain a paradox known since antiquity: what is it that sometimes brings generals to burn their bridges or admirals their ships?

It seems absurd. Why not keep all the means at one's command, why give up the use of some of them? Thomas Shelling has shown, by means of a very simple example in game theory that it can be rational to give up some facilities with a view to obtain a strategic advantage."

I could have picked other examples, but these seem to me relatively accessible examples of interesting economic work, which is not "simply writing equations".

It is work that the ordinary person ought to be aware of, in my opinion.