My Preference for Endogenous Preferences (which may be endogenous)

The recent financial crises has resulted in a chorus of voices claiming that we have exhausted the limited explanatory power of neoclassical economics. The leading problem with that view, most people seem to think, lies with the oversimplifications inherent to the rational actor model. As a result, there has been a wave of hype and excitement about the nascent fields of behavioral economics and neuroeconomics. That kind of out of the box thinking seemed like it could blaze the trail to a new kind of economics--an economics in which new understanding of perplexing economic and financial trends that had eluded neoclassical thinkers would finally come about.

But it wont. I think. The thing is, the primary paradigm of economic research suffices to account for many market phenomena. Of course, the original formulations of neoclassical theory left some phenomena unexplained (say, certain auction behavior). However, progress on those questions came not in the form of a true revolution, but rather a tinkering with the standard tools of rational actor theory (e.g. the development of game theory to explain auctions). To draw from Kuhn, one should distinguish between progress within a paradigm and a true scientific revolution. The development of game theory, institutional economics, and information economics were all cases of the former--the standard toolkit was expanded, but not replaced. That kind of progress has gone a long way (at least for explanatory purposes, if not forecasting). A true revolution requires a new paradigm that fully replace the old one, while providing an avenue to explain new phenomena.

Right now, behavioral economics constitutes a series of experiments that show that individuals behave in "predictably irrational" ways contrary to many predictions of standard economic theory. However, what's lacking is a consistent grounds for a new understanding of economies. What effort has been made to create a conceptual frameworks in which to place experimental findings has been akin to earlier efforts to tweak the existing paradigm--the goal is to find concrete rules which economic actors follow, be it rational maximization or some other heuristic--either way the mode of research stays the same.

Nonetheless, I do think that economic research is reaching a stasis point. Most papers these days are pained to find some setting of interest which lends itself to economic analysis--be it auctions of oil wells, regulation of a certain kind of forest, or new tax breaks in Swaziland--but the pace of progress in our understanding is slowing under the current framework. The aftermath of the financial crisis and the recession has made this clear, and the failure of neoliberal development policy has done so as well.

So I've been thinking: if there were a revolution in economics, what would it look like? What about the standard toolkit is holding economics back? It's worth mentioning that Kuhn found that most ideas that became revolutions were not new--in fact, they often were as old as the previous paradigm, but were never really necessary enough to be fleshed out. So it's probably something already out there.

My bet: endogenous preferences.

What do I mean by that? What unites all economic theory is that characteristics about the individual are treated as fixed and predetermined, or exogenous. Most importantly, our motivations are predetermined biologically (genetically, really), presumably. As if our conception of desirability and experience of satisfaction is absolute, and not materialized in our relationships with others.  As if fashion is absolute. As if social psychology doesn't exist.

And that's nuts. That sort of oversight should be implicated in the failure of economic forecasting, some of the "revolutionary" findings of behavioral experiments, and, above all, the inevitable failure of economic imperialism. And it's not like people don't know that its nuts--economic anthropologists and sociologists have been screaming at the top of their lungs about this stuff for decades, begging to be heard. These ideas are definitely out there, waiting for their moment.


Tyler Cowen recently  wrote a very good post on the related subject of methodological individualism (and the lessons to be learned from Foucault) a few weeks ago.  In economics, everything can be reduced to the behavior of individuals, just as in physics researchers boil everything down to the behavior of basic particles. But, as Cowen notes "actual historical explanation relies on the use of broad categories, classes, and exemplars, and in a manner which is not logically reducible to statements about individual beliefs and desires." Why? One important reason is that's how people understand the world, and that informs the decision-making process. If economics really wants to go imperialist in the pursuit of better development and business cycle models, they are going to have to deal with that fact sooner or later.

Maybe I'm overselling endogenous preferences. In truth, endogeneity of key individual attributes can be brought under the individualism umbrella. With sophisticated mathematics, one could develop an economic model in which individual attributes are both a product of external factors and the primary units of analysis. It would be very difficult to tie those models to concrete cases, but I bet it could be done. Above all, those models would create a framework for better understanding the world, even if it has to remain an abstraction--much as Walrasian equilibrium theory did. Would that sort of shift constitute a true revolution, then? It's hard to tell, but I'm guessing that sort of innovation, coupled with new inputs from biology/neuroscience, would result in a new sort of understanding of socio-economic phenomenon, and a new paradigm for research at that. The result could wind up being a framework which accounts both for run-of-the mill economic phenomena and for the strange results coming out of behavioral labs. Neoclassical economicsCBO to abandon DSGE or I/O models anytime soon).

When you search for "endogenous preferences" in google scholar is this one by Samuel Bowles. Bowles is now at the Santa Fe Institute, whose researchers the WSJ's has hinted are, in fact, the best promise for a new economics.

Economics Doesn't Care About Your Free Will

A while back, the New York Times ran a few interesting pieces on free will as part of "The Stone", their philosophy blog feature. Now that the academic community has come to accept that our minds are essentially physically determined systems, though, the debate quickly becomes tired. The big questions that lure most people to the subject--i.e. "do I really have agency, or are my actions predetermined?"--have been set aside and replaced by legalistic, technical discussions about responsibility and ethics--"given that the mind is a product of physical processes governed by the laws of physics, how can one assign responsibility for a wrongdoing?" However, I suspect that outside of academia, most people still carry with them the question of whether or not their thoughts and actions are really predetermined. Determinism is a hard pill to swallow.

What I find really interesting, though, is that, from the perspective of rational choice theory, our actions are effectively predetermined even if we have complete free will. In economic and decision theory models, people come to the table with preferences and a set of choices that entail various costs and benefits (and, to be accurate, certain beliefs about their situation). Even if individuals have complete free will, as long as people do what they are motivated to do as guided as their beliefs (this is what I understand to be meant by "rationality," and it is tautologically true), every decision and action will be a function of their beliefs, values, and choice set. That is to say that even if one has complete agency, the use of that agency is predetermined by one's innate preferences and the outside environment. Therefore, even back in the days when one could claim with impunity that the free mind was a thing apart from the brain, behavior could still be described as deterministic.

Admittedly, this account focuses narrowly on instrumental rationality. One might claim that we can escape from rational choice determinism through the choices we make about our values and beliefs. But that begs the question--on what basis are those higher-order decisions made? If we follow some higher ethical code as necessitated by rationality, then that code is determined outside our minds, and there must be some basis for us choosing to do so. It seems likely to me that, as long as the individual in question is an agent with a unified, self-consistent thought process, some sort of determinism will necessarily result. Of course, the brain is not really a unified, self-consistent thought process, but then we're getting back to the basic questions of the nature of brain processes and free will.

What's worth noting, though, is that in economic models, agency doesn't really matter either way. If we were somehow granted free will after lacking it beforehand, all that would change is that we would get to feel good about having free will. Life would go on the same.

Rising "Tide"

As someone who likes riding trains and travels to Norfolk at least once or twice a year, you'd think that I'd be pretty excited about "The Tide," Norfolk's almost-ready light rail system. 

But, as the people I know who live there are quick to point out, it doesn't really go anywhere that useful. The current route traverses the downtown area (mostly street-running), and then follows an old abandoned right-of-way through sparsely populated areas in the south of the city, and then just kind of... ends. Sure, there will be some transit-oriented development in those neighborhoods, what current residents do live there will have greater access to downtown, and (provided service is regular enough), it will be easier to move around the downtown area without a car. And yet, there is nothing particularly special or promising about the areas around the end of the line except that they surround a convenient right-of-way. 

Until you look at a larger map. While it's true that the right-of-way doesn't lead anywhere in Norfolk, the old right-of-way continues three miles directly into the heart of Virginia Beach's recently developed "Town Center," which is now a major commercial center and heart of one of the densest residential neighborhoods in that city. (On the map below, the red line is the current route, and the purple line is the continuation of the ROW to Virginia Beach Town Center). What's more, is that the right-of-way continues directly to the Oceanfront region of Virginia Beach, which is a major recreation/business destination. While connecting downtown Norfolk to a few random neighborhoods might only have a modest impact, connecting the largest commercial centers (passing through the most densely populated parts of Virginia Beach) in a region plagued by increasing traffic congestion will likely be a great boon for the metro area. 

So, yes, the current system route looks pretty silly. But Norfolk probably didn't build the system to look like it does now--they built it knowing that Virginia Beach would be lured into completing the line. The original proposals called for a line connecting the CBDs of Norfolk and Virginia Beach, but Virginia Beach pulled out in the end. Norfolk made a bold move in going ahead--the route they built will stand on its own, but probably won't flourish without a Virginia Beach extension. But with the line now built, an extension at least to the Town Center is a pretty tempting prospect for Virginia Beach. And it looks like they're starting to give way--a year and a half ago, Mayor Sessoms went ahead and arranged for the city buy the remaining section of the right-of-way. And the city's 10-year moratorium on the issue is finally up. Now one can only hope that poor management of Hampton Roads Transit doesn't botch it.

In the meanwhile, Norfolk will just have to make the best of the system they have--if it does actually get running.

The Caper of the Lingering Anacostia Taboo!

Maybe this is a misperception, but I get the notion that a lot of people in my demographic have a vision that the south/east side of the Anacostia river in DC is some sort of backwards ghetto. Not only the kind of place you wouldn't want to live, but the kind of place you wouldn't want to set foot in. It's common to hear people advise newcomers to "avoid Southeast", as if DC were an analogy for the Old World, in which the south and east were associated with primitiveness and underdevelopment. You might remember the Maine Tea Party's warnings along these lines. Perhaps it's a matter of concern over high crime rates (as if one is likely to be shot on sight), but many people I talk to believe that even the built environment constitutes some kind of depressing slum.  I suppose that, growing up in DC, I bought into some version of that narrative too.

Out of curiosity, I've started going on runs and bike rides across the river to see for myself what lies on the other side.

To my surprise, most of what I've seen looks perfectly nice. Most of it is pretty quaint, and typical of middle-class neighborhoods in the DC area. Admittedly, there is a sizable idle population, and idle minors do tend to cause trouble. And, although it's true that there is not much commercial development to appeal to young urban types like myself, the bulk of the landscape is very pleasant. Nice, quiet, neighborhoods.

You may have known this all along. But if you didn't, here's what you can expect to find:

Dropping the streetview man randomly in another neighborhood across the river:

As someone walking down the street, it was hard to visually distinguish many of the neighborhoods I've been wandering through from the ones near my childhood home in far northwest. Like, say, Hawthorne:

Pretty similar, right? (Though, "nicer neighborhoods" can be usually be picked out by their lack of sidewalks.)

By contrast, this is a typical streetscape inwest Baltimore:

Homey! And this is east Baltimore (seriously, try dropping the streetview guy somewhere random anywhere near the Hopkins' Medical School):

See, now that's a downer streetscape. When 50% of doors are boarded up on a block, and 20% are missing their doorsteps, then the neighborhood can be described as in need of some sort of salvation. But markedly different than what exists in the wider area people like to call "Anacostia" (which, I realize, is different than the neighborhood called Anacostia.)

To fail to understand how livable the neighborhoods across the river is to risk missing an important point concerning the political tensions that were on display this past election cycle, in particular the backlash against "Smart Growth" types. I would guess that many residents in wards 7 and 8 feel like they live in pretty nice neighborhoods as they are. However, the ethos of the Fenty administration and its supporters (in contrast to Gray), is that the south and east of the city are in desperate need of salvation--reshaping, really--both in terms of its values and in terms of its physical environment. Which could only be expected to alarm current residents, who probably enjoy the fact that they aren't being overrun by youngsters (who tend to be Fenty supporters) who stay out late at rowdy bars and who are willing to pay hefty sums for rent, as H street NW, Logan Circle, and U St NW are. Sure, education needs to be improved (given worsening unemployment), and crime needs to be kept down. But it seems to me to be very important to not assume that someone hates his or her life until they personally tell you they do. Otherwise, you're bound to make enemies.