Gary Becker’s big mistake27 July, 2016 at 18:21 | Posted in Economics | 3 Comments
The econometrician Henri Theil once said “models are to be used but not to be believed.” I use the rational actor model for thinking about marginal changes but Gary Becker really believed the model. Once, at a dinner with Becker, I remarked that extreme punishment could lead to so much poverty and hatred that it could create blowback. Becker was having none of it. For every example that I raised of blowback, he responded with a demand for yet more punishment …
You can see the idea in his great paper, Crime and Punishment: An Economic Approach. In a famous section he argues that an optimal punishment system would combine a low probability of being punished with a high level of punishment if caught …
We have now tried that experiment and it didn’t work … Most spectacularly, the experiment with greater punishment led to more spending on crime control and many more people in prison …
In the economic theory, crime is in a criminal’s interest … But is crime always done out of interest? The rational actor model fits burglary, pick-pocketing and insider trading but lots of crime–including vandalism, arson, bar fights and many assaults–aren’t motivated by economic gain and perhaps not by any rational interest …
The rational choice theory was pushed beyond its limits and in so doing not only was punishment pushed too far we also lost sight of alternative policies that could reduce crime without the social disruption and injustice caused by mass incarceration.
Interesting article, but although Becker’s belief in his model being a real picture of reality is rather gobsmacking, I’m far from convinced by Tabarrok’s instrumentalist use of the same kind of models.
The alarm that sets off in my brain when reading Becker is that ‘rational actor models,’ rather than being helpful for understanding real world economic issues, sounds more like an ill-advised plaidoyer for voluntarily taking on a methodological straight-jacket of unsubstantiated and known to be false assumptions.
The assumptions that Becker’s theory builds on are, as Tabarrok and almost all empirical testing of it has shown, totally unrealistic. That is, they are empirically false.
That said, one could indeed wonder why on earth anyone should be interested in applying that kind of theory to real world situations. As so many other mainstream mathematical models taught to economics students today, it has next to nothing to do with the real world.
From a methodological point of view one can, of course, also wonder, how we are supposed to evaluate tests of a theories and models building on known to be false assumptions. What is the point of such tests? What can those tests possibly teach us? From falsehoods anything logically follows.
Modern expected utility theory is a good example of this. Leaving the specification of preferences without almost any restrictions whatsoever, every imaginable evidence is safely made compatible with the all-embracing ‘theory’ — and a theory without informational content never risks being empirically tested and found falsified. Used in mainstream economics ‘thought experimental’ activities, it may of course be very ‘handy’, but totally void of any empirical value.
Utility theory has like so many other economic theories morphed into an empty theory of everything. And a theory of everything explains nothing — just as Gary Becker’s ‘economics of everything’ it only makes nonsense out of economic science.
Using false assumptions, mainstream modelers can derive whatever conclusions they want. Wanting to show that ‘all economists consider austerity to be the right policy,’ just e.g. assume ‘all economists are from Chicago’ and ‘all economists from Chicago consider austerity to be the right policy.’ The conclusions follows by deduction — but is of course factually totally wrong. Models and theories building on that kind of reasoning is nothing but a pointless waste of time — of which Gary Becker’s ‘rational actor model’ is a superb example.