In a recent blog post dated 20 October on his blog Marginal Revolution, our friend and colleague Tyler Cowen, an economist at George Mason, shared with his readers his typology of economic approaches to the world: (1) the rational actor approach or “Econ 1.0,” a world full of stable preferences and populated by cold and calculating utility maximizers, i.e. fictional creatures who are maximizing hypothetical utility functions; (2) the behavioral approach or “Econ 2.0,” a world full of biased, imperfect, and cognitively-challenged individuals who are “satisficing” as best they can their unstable preferences; and (3) the cultural or social approach or “Econ 3.0,” a world full of flesh-and-blood people with complex and overlapping mixtures of cultural self-identifities and social loyalties. (For the record, we include Prof Cowen’s typology in full below the fold.) For our part, we find this typological triad to be very useful, and we agree with Cowen that Cultural Econ (Econ 3.0) is the way to go. Classical Econ (Econ 1.0), corresponding to what our intellectual hero Ronald Coase used to derisively describe as “Blackboard Economics,” generates true but mathematically trivial (for the most part) results. Likewise, Behavioral Econ (Econ 2.0) doesn’t get us very far, since our biases tend to run in opposing directions. In short, as much as we love building formal theoretical models, history and culture are just as important as mathematics and psychology.Tyler Cowen is pictured below; here is Tyler’s typology in his own words:
1. Beckerians and the rational actor model. I slot Peter [Lesson] in here, along with many Chicago School economists, Marvin Harris, and much of public choice economics. An explanation shows how a social outcome stems from the interaction of means-end maximizing individuals, translated into some aggregate result.
2. Behavioral economics. By now this is old news, but these researchers find what I consider to be relatively small deviations from the rational actor model. This is usually done by measurement, rather than through more complete models.
3. Cultural economics, anthropologists, and many sociologists. Peer effects are paramount, and Frenchmen see the world differently than do Americans, not to mention Bantus or Pygmies. This is due to a social contagion of perception that does not boil down to rationality in the sense that economists understand it (you can build a model in which social mimicry at young ages is rational, but that model won’t generate much insight into the particular phenomena we are trying to explain, nor does that model pick up the mimicry mechanism very well). Historical study plus thick description plus economic rationality at various margins (but margins only) plus some statistics is the way to go. Mostly we’re trying to understand how and why other groups of people see the world in fundamentally different terms.