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Article Excerpt
Why did I become a labor economist concerned with the institutions that affect the lives of workers and the organization of work when I could have been an investment banker, McKinsey consultant, used car salesman or even a theorist working out the truths of the Invisible Hand on a blackboard in some dark office?
When I was in grade school, I did not dream of becoming an economist. I doubt that any kid does. I was more enthralled with literature--ah to write the great American novel--or with managing a stable of villainous professional wrestlers ala the Grand Wizard, Lou Albano or Classie Freddie Blassie. Those would be fun careers. Economics? Didn't someone call that the dismal science? Who wants to be dismal?
There is an answer to the why economics question that would please the Invisible Hand. This is that at age seventeen I calculated the expected present value of lifetime earnings from economics and other plausible careers and, taking account of my preferences toward work activities, money, and risk, picked the career most likely to produce the highest utility. The Hand would be even happier if I told you that I had carefully weighed my abilities and interests--strong but not Putnam Prize level math abilities, strong but not Chekhov level writing abilities, strong but not Nelson Mandela level social concerns--against the payoffs to those abilities/ interests in different professions and determined that economics was the best fit.
At some level, Invisible Hand explanations of career choice work as a good first approximation for many of us. In a sample of thousands of young persons choosing careers, I almost surely would be in the set of those who fit economics and not in the set of those who fit pro wrestling (save as a manager or script writer). But I am also sure that many in the suitable-for-economics set chose other occupations--law, literature, investment banking, sociology, and so on. Economic models of individual outcomes invariably have huge residuals that tell us that they miss much about what determines individual choices and payoffs.
The economics of education, for example, lives on the fact that education raises earnings. But regressions of In earnings on formal education, however measured, explain less than 5% of the variance in In earnings. Within each education group, there is a huge dispersion of earnings among observationally equivalent people that dwarfs the variance across the groups. Economics majors from Harvard of the same age, gender and race and with similar grades, for instance, will have very different earnings ten or twenty years later. One may end up a six-digit earner while another struggles to keep up with the bills.
In physical science, it is irrelevant which rapidly moving atom interacts with neighboring atoms to equilibrate the level of heat in some closed space or which molecules interact with other molecules to form a chemical compound. The atoms and molecules are identical. But our genes and environment make humans heterogeneous, and we invariably ponder the unique factors or accidents that lead us down one path over another. Unless the cosmologists' hypothesized multiverse is true, there is no way to test any story of how idiosyncratic events affect long term outcomes, and even then it would require traveling to other universes, Dr. Who style. The most we can do is tell a consistent believable story about why we got to where we are.
What set me up to choose economics was Isaac Asimov's Foundation series of science fiction books (1). The 1st volume of the series laid out the key proposition that, Hari Seldon be praised, it was possible to construct a science of history. Equations based on verified knowledge could predict the flow of history--at least up to the point where uncertainty allowed the heroes of the series to gain better outcomes for humanity through their brave deeds. The 2nd volume of the series taught the reader that economics dominated military power in determining history. The Foundation expanded through its trading practices. Free trade helped it survive the efforts of the mighty Empire to crash it.
I read the Foundation series in junior high school when I caught the learning bug and spent every free moment devouring any 50 cent paperback on whatever caught my fancy--history, literature, science fiction, Greek culture, religion, philosophy, psychology, astronomy, jazz, mathematics, whatever. It was a mad effort to learn all there was to know about anything and everything. There were no interesting economics books in paperback (2) to compete with George Gamow or Edith Hamilton, with Asimov and the other science fiction stars, or with Euripides and Sophocles and the Bhagavad-Gita or Chekhov or Scott Fitzgerald. So my first appreciation of social science and the power of economics came from the Foundation series. My guess is that most junior high school devotees of science fiction are entranced by the speculative physical science and go on to careers as inventors, engineers, scientists. What I took away was the notion that the aggregation of individual actions rather than the decisions of kings and queens determined the flow of history and that it was possible at least in the far-off future to write down equations that would predict how those actions determined the flow of history. Wow!
In college, I quickly learned that history was not a science; that sociology explored fascinating problems with no clear conceptual framework; and that while experiments made psychology a science its focus on the individual offered no insight into how behavior aggregated to produce historical change. By contrast, economics had the logical structure of science and dealt with micro and aggregate behavior in ways that could illuminate the dynamics of historical development. To understand the broad sweep of history, one had to begin with economics, or so it seemed to me. I bet that Haft Seldon studied economics before writing down the dynamic general equilibrium equations that underlay the Foundation series.
Still, there were aspects of economics that troubled me. Economics lacked the verifiable facts and invariant relations that characterized experimental sciences. It relied too much on abstract principles and too little on careful investigation of actual behavior for my taste. The applied calculus of price theory seemed far removed from business reality, at least as presented in undergraduate micro-theory. If all that was required to run a successful business was to differentiate profits functions, why were managers so highly paid? If they did more than that, why we were not taught what they did? When I posed these questions after one particularly tiresome class, the answer that there was a gap between theory and reality did not sit well with me. Science is supposed to fit reality. Why didn't economists start filling in the reality instead of fussing with indifference curves and tangent lines and, even worse, Edgeworth-Bowley boxes? Wouldn't it be better to learn the calculus stuff fast and spend the rest of the time trying to understand the real world?
In grad school I read Samuelson's Foundations and loved it. That was the way to teach economic theory. But I wanted more from economics than the mathematics of optimization. I wanted economics to answer the big Hari Seldon questions. What leads some societies to succeed and others to fail? Can a society organized around the interactions of ordinary folk (the Foundation) defeat a totalitarian juggernaut run from on high (the Empire)? That was a real issue in the 1960s and 1970s when the Soviet economy seemed to grow faster than the US economy (few realized how inefficient the Soviet system was or that the service sector rather than heavy manufacturing was the economic future). By allocating resources through central planning the Soviets had developed an advanced military technology that risked blowing us all up.
One of the supposed advantages of the Soviet system was that the state could order young people to go into engineering and science and work on projects the state deemed in the national interest while the US let immature young people...
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