This beautifully produced book has enough analytical detail to interest the most demanding microeconomist, but by skipping the heavy math (there's not much), the interested researcher outside economics (including philosophy) will find this a rich and tumultuous glimpse into the current state of microeconomic theory, facing a barrage of criticism from a new breed of "neuroeconomists." Caplin and Schotter have done a fine job of pulling together key contributions to our understanding the main issues in the current confrontation between neuroeconomics and standard microeconomic theory, and pointing a constructive way forward.
The book is fascinating from two quite different standpoints: economic theory and the sociology of knowledge. The latter is particularly showcased, if inadvertently, in this book. My personal experience is that when a new research area is born, many of the smartest and scientifically committed people fail to understand simple issues, and make assertions that are completely indefensible. In the short-run, in the face of a group of hopeful innovators, there is a "circling of the wagons," in which groups of researchers with opposing viewpoints utter statements that are both incorrect and exhibit a high degree of hostility, contempt, and anger. These negative emotions are stirred up by the fact that the content of the criticism of the other side is often contemptuous and incorrect. Eventually, this all gets sorted out, but this can take a decade or more.
I know this from being in the line of fire, not just an observing bystander. I'll tell the story for readers who are interested. Otherwise, skip to the paragraph "Of course, underneath..."
In about 1994, the John D. and Catherine T. MacArthur Foundation decided to lay big bucks on a research project into "The Structure and Evolution of Norms and Preferences." There was much competition for leadership of the project. I decided right away that the goal of such a project should be to be deeply respectful of standard theory, and depend completely upon the quality of the data generated and analytical models dedicated to interpreting this data to convince the economics profession of the value of our work. The alternative, of course, is to try to do an "end run" around the profession by bad-mouthing it and dismissing its supporters as idiots and cretins.
On this basis of this approach, the MacArthur Foundation asked me and Paul Romer to run such a group. After a few years, it came time to renew this grant, the proposal for which I duly wrote (with advice from my new co-chair, anthropologist Robert Boyd), keeping carefully in mind not to ruffle the feathers of traditional economists. We were awarded the renewal, but some of the comments of the reviewers completely shocked me. I had no idea we were such anathema to the economics profession. Here are some excerpts (my copy is dated January 22, 2002).
1. the first three pages [of the proposal]... made my skin crawl. All of this garbage about "hard-nosed" economists makes me very angry, because non-economists might really believe it, and it's just not true.... [The Norms and Preferences] network has done so much good work that it's a shame to "front" it with this kind of tripe.
2. A few days ago a wire service ran a story quoting one member of this network to the effect that the network had showed, in contrast to orthodox economics, that people actually care about one another. I will spare the [MacArthur] Foundation the details of the reaction this article elicited from my colleagues; suffice it to say they were angry and contemptuous...
3. I cannot think of any more effective way to undermine the goal of increasing the usefulness of the discipline of economics than having a foundation as prestigious as MacArthur appear to be funding a group of people who have such a limited understanding of economics.
My point here is that despite my best intentions, I had not succeeded in avoiding stirring up the emotional dross that comes along with innovations that are not securely within the established paradigm. In fact, I probably needed a little "in your face" verbiage to make up for the absence of the theory and evidence that would eventually make my intended case in a more mature way. Neuroeconomics is a new intruder into economic orthodoxy, and still has its share of bravado, smoke and mirrors. For me, it is comforting indeed to be a bystander rather than a participant in the ensuing melee.
Of course, underneath the Sturm und Drang, there are real scientific issues that must be resolved before calm is restored, and this is rarely a matter of one or two experiments, but rather an onslaught of findings that make the alternative explanations increasingly tendentious and strained, and which have found a way to preserve the truths of the past along with the new ideas. We are in the midst of such a period in dealing with the effect on microeconomic theory of the increasing volume of data concerning the brain activity underlying individual choice and strategic interaction, data uncovered by a new breed of self-styled "neuroeconomists" (several of the prominent among whom were part of my MacArthur research group, which wrapped up its work last year).
Here is the most fundamental claim of the neuroeconomists (a quote from Colin Camerer, p. 6-7, written in 2005): "advances in genetics and brain imaging [tell us]... that we will eventually be able to replace the simple mathematical ideas that have been used in economics with more neurally detailed descriptions." Statements like this (and the neuroeconomists are not stingy with their pronouncements) are bound to shed heat rather than light. The merit of the book is that it cuts through the verbiage to allow the reader to come to a (provisionally) informed opinion of what is really going on.
For the record, there is virtually no chance that neurological data will replace standard economic reasoning, for reasons well expressed by Faruk Gul and Wolfgang Pesendorfer. I like the following analogy. Suppose far into the future people use computers all the time, but how they work---what is on the inside of the shiny, impenetrable boxes---has long been forgotten. Nevertheless, there is a field called "Computer Science" in which people learn to program computers, develop computer algorithms, manage databases and communication facilities, and even give computers specifications for constructing more powerful computers (which they do inside impenetrable shiny boxes). One day, some New Electronics people invent a tool for seeing what is going on inside the computer, and find that there are oodles of silicon chips chugging away there. They also discover that programming the computer in different ways leads to different parts of the computer's innards to light up in different ways. Indeed, they find that by looking inside a defective computer, they find strong regularities between different silicon areas and the particular computer defect involved. Now, all of this is very exciting, and the New Electronics people publish a manifesto asserting that soon there will be no need for computer science, because the direct inspection of the operation of electrons in silicon pathways will "replace the simple mathematical ideas that have been used in computer science." Of course, the New Electronics people may be making very important discoveries that may indeed be of use to computer scientists, but it is a category error to say that the new knowledge will "replace" the old.
The response of Gul and Pesendorfer to such maddening pronouncements is to abandon all reserve, and to exclaim that neurological data have absolutely nothing to do with economics. "Neuroscience evidence cannot refute economics models because the latter make no assumptions and draw no conclusions about the physiology of the brain." (p. 4) This is hardly convincing. What if a homeopathic physician claimed that nothing about human physiology could refute homeopathy because homeopathy makes no assertions about human physiology? Not very convincing. Indeed, Gul and Pesendorfer make many telling points in their introductory essay, which is the foundation for the remaining articles in the book, but they embrace a restrictive economic methodology known as "revealed preference theory" which is not very persuasive. Revealed preference methodology was first developed by Paul Samuelson at a time when Skinnerian behavioral psychologist was still all the rage. According to this approach, economist don't care at all about what goes on inside people's heads---all they care about is how they behave.
This view sounds attractive at first blush, but it has two fatal flaws (as carefully and creatively discussed by several authors in later chapters of the book). The first is that people expect economics to be useful for policy purposes, which means saying something about what economic policies will improve the welfare of individuals in society. Revealed preference theory says nothing about "individual welfare" except that we must assume that people do best by getting what they choose. For this reason, Gul and Pesendorfer are dismissive of microeconomic policy, equating it with therapeutic psychotherapy. "Standard economics," they assert, "has no therapeutic ambition." (p. 5) This idea, of course, not only wrong, but silly. Of course economics is connected to social policies, if not for all economists, at least for many. Moreover, we know from everyday observation and behavioral experiments that people do not always choose what is good for them, and they often know this. For this reason, many behavioral economists today espouse a form of "light paternalism" in which social policies recognize human foibles and correct them in a way that is compatible with the respect for individual liberty.
As good traditional economists, Gul and Pesendorfer have nothing but contempt for any form of paternalism. I experienced similar hostility from Paul Samuelson himself in his Nobel Prize acceptance speech of 1970, responding to a paper I wrote in the late 1960's, in which I observed that "some preferences are better than others," .a position advocated before me by John Stuart Mill in his opposition to Jeremy Bentham's utilitarianism. Throughout most of its history, economic theory has followed Bentham, who opined "Prejudice apart, the game of push-pin is of equal value with the arts and sciences of music and poetry. If the game of push-pin furnish more pleasure, it is more valuable than either. Everybody can play at push-pin: poetry and music are relished only by a few." Bentham's egalitarianism is laudable, but the alternative is that Pushkin is better than pushpin, and the uneducated are cut off from fruitful paths of self-realization by not being capable of appreciating Pushkin. Happiness, I argued in support of Mill, is as much the development of preferences as their satisfaction. "Just recently," writes Samuelson in his 1970 speech, "I was reading an article...The writer was scathing on the notion of Pareto-optimality. Yet...it seemed to me that precisely in a society grown affluent...there arises an especial importance to the notion of giving people what they want."As evidence of progress in economic theory, and pace Gul and Pesendorfer, there are probably few economists alive today that do not believe that an important contribution of the economy to well-being is the improvement of moral character and personal capacities to enjoy what life has to offer.
Kudos to Caplin and Schotter for this fine book, which allows us to cut through much of the excessive verbiage towards a better understanding both of the deep wisdom embodied in standard economic theory, and the momentous changes that theory is undergoing at the hands of experimental economists, behavioral game theorists, and neuroeconomists.
