Economics and Scarface

Economics and gangsters go hand in hand. They are about supply and demand, maintaining monopolies, politics and cheating.

I could have called this blog Economists and any movie or TV show about gangsters. But Scarface’s famous quote sums it up nicely:

“If you can’t see the angles no more, you’re in trouble.” 

In my blog about Rocky IV, I talked about how some economists had fallen foul of having lived in the lab, not in the real world. The lab-inhabiting geniuses have done wonders to advance the mathematical science, but when applied, the academia has sometimes failed because it has not considered “all the angles”.

There is no better example of this than Gary Becker’s “Economics of Discrimination” as described by Joseph Stiglitz in his book “The Price of Inequality”:

“Some economists [Becker is cited as one] have argued that discrimination was impossible in a market economy. In a competitive economy, so the theory went, as long as there are some individuals who do not have racial (or gender or ethnic) prejudices they will hire members of the discriminated group because their wages will be lower than those of similarly qualified members of the not-discriminated against group.”

Jaw dropping stuff.

Gary Becker was a popular and intelligent economist and yet as this analysis shows, theoretical economists don’t always see all the angles.

In much economic modelling, the exclusion of certain angles is valid. It is useful to isolate specific variables so we can understand how they behave. But when applied to the real world, we must include all the variables before prescribing policy, or forecasting outcomes.

Indeed, when economic policy has failed it is often because the variables selected to prescribe it have been selected to bolster pre-existing beliefs rather than to forecast accurate outcomes. I have given my thoughts on the Laffer Curve and Hannan’s baked beans already. Both being apposite examples of unscientific result-chasing variable selection.

One of the more interesting introductory books on economics is Partha Dasgupta’s “Economics: A Very Short Introduction”. His discussion is much more about real world interaction than mathematical modelling.

Paul Krugman notes:

When you’re doing micro, you assume rational individuals and rapidly clearing markets; when you’re doing macro, frictions and ad hoc behavioral assumptions are essential.

I want to say loud and clear that despite the failures in applied policy, mathematical modelling is invaluable.

Simon Wren-Lewis warns:

Some have used events like the financial crisis to call for a complete overhaul of how economics is taught. Heterodox economists want much more pluralism, and many other social scientists want economists to be much more familiar with what they know and do. I have some sympathy with both views, but – as an economist would say – only at the margin. The reason is very simple: to go even half way towards what these heterodox economists and social scientists want would involve throwing out much that is even more valuable.

So where does that leave us?

It is up to us to check that the information we absorb covers all the angles. But so often our public opinions are like our choice of clothes. They reflect who we are. They let us fit in with those around us.

So I can only make a plea that we state our opinions carefully. We must make sure our opinions are verified, based on current information and, above all, not just to make us feel good.

In many areas (and not just the obvious ones such as climate change, xenophobia, benefit fraud and the effects of fiscal contraction) deeply held prejudices are winning over good analysis.

With the 2015 UK general election looming, the stakes are high. When a gangster fails to see all the angles, he could be staring down the barrel of a shotgun. If we ignore some of the angles in May, there might be a similar fate awaiting us.

Few TV shows have had such good content about real world economics as The Wire. So I am going to give the final words to Slim Charles:

“The game’s the same, just got more fierce.” 

Extra thought added 4th April 2015

For a more complex discussion about economic modelling try Simon Wren-Lewis’s post.


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