John Kay: Economics makes for good fun at parties

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Few mothers are thrilled to learn their daughter is dating an economist. They expect that their prospective son-in-law (economics being the only social science in which male students greatly outnumber females) will be opinionated, boring and wrong. I dread admitting I am an economist. The cab driver quizzes you on what is going to happen to the economy, the dinner companion turns to talk to the person on the other side and the immigration officer says, with heavy sarcasm, that his country needs people like you.

There is a widespread misconception that all practitioners of the dismal science are engaged in what Paul Krugman, the Princeton economist, calls “up and down” economics – the bond yields are going up, the rupees are coming down. Economics would indeed be a dismal science if its main purpose was to forecast, inaccurately, the future course of interest rates and currencies. But few economists do this, and those who do are not well regarded, even if well paid.

The concerns of most economists are quite different. They are engaged in microeconomics, the study of households and businesses, markets and industries. Alfred Marshall, author of the first great economics text, Principles of Economics, published in 1890, defined his subject as the study of mankind in the ordinary business of life.

In the last year, two successful books – Stephen Levitt’s Freakonomics and Undercover Economist by Tim Harford of the Financial Times – have attempted to bring Marshall’s conception of economics to the dinner table, the cab driver and the customs official. Mr Levitt and Mr Harford are undeniably opinionated but they are not boring: whether they are wrong you must decide for yourself. Their concern is not to predict the future but to interpret the world.

Mr Levitt’s most celebrated finding attributes the fall in the US crime rate in the 1990s to the Supreme Court’s 1973 abortion ruling in Roe v Wade. Mr Levitt claims that aborted children would have been more likely than average to commit offences as young adults. He supports this argument with evidence on the differentials in crime and abortion rates across American states.

The approach is disconcerting because of the detached cynicism it brings to a subject surrounded by morality, emotion and conflicting assertions of rights. Mr Levitt brings that same sentiment to several other topics – the names parents choose for their children, the relative riskiness of guns in the house and swimming pools in the backyard.

This is social science as it should be, the methods of science applied to issues of social concern. If the commercial success of Freakonomics is encouraging, it is less encouraging that many people find its approach novel, even eccentric. You need only read a newspaper column, or listen to a speech from a political or business leader, to see how what people state to be fact is driven by prior ideology or desired conclusion.

If Mr Levitt attacks the ordinary business of life with data and statistical method, Mr Harford attacks it with economic theory. He provides a relentless application of the basic economic principle that people respond to incentives, and uses it to provide an eloquent explanation of why coffee at Waterloo station is expensive and people in Cameroon are poor.

Incentives do matter, although the obsession of many economists with this idea can become tedious. It is important to stop short of the barmy extremes of some Chicago economists – who would get married to derive economies of scale in household production and commit suicide when the net present value of future utility becomes non-positive (after allowance for the value of future options to commit suicide, calculated using the Black-Scholes formula). They discredit the profession as much as the “up and down” economists do. The ordinary business of life must keep some room for love and soul.

But as long as the young economist achieves that, he will find in Mr Levitt’s and Mr Harford’s books sufficient everyday topics of conversation to captivate a future mother-in-law and turn the tables on a loquacious cab driver.

John Kay’s latest collection of writings, The Hare & the Tortoise, will be published on June 6

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