George Akerlof: Economics’ Sins of Omission


Rob talks to Nobel laureate economist George Akerlof about economics’ bias against the “soft” social scientific perspectives of anthropology, sociology, and psychology in favor of “hard” economic models that attempt to replicate iron-clad scientific laws. They also discuss how to reform the economics profession and the needs of a new generation of economists.

Transcript

Rob Johnson:

I’m here today with George Akerlof, who is a professor at the McCourt School of Public Policy at Georgetown University and a Nobel Laureate from the year of 2001. He works very closely with me at INET and has been involved with our academic council, and been a great source of inspiration and expertise to our governing board and to our research fellows. George, thanks for being with me here today.

George Akerlof:

It’s my pleasure.

Rob Johnson:

So we’re on the 8th of May, 2020, when we talk. The pandemic, the lockdown, the nature of what’s unfolding in the economy, all of these things are kind of being stirred. Many things that were taken for granted have been unmasked. How do you see what’s happening? How does it affect the way we organize the world, perhaps in an irreversible way, the way things will evolve, the way ideas will change? Who’s doing things well? What more do we need to be doing? So that whole kind of panoply of questions. I’ll leave it to you to explore for a bit.

George Akerlof:

Okay. So just this morning we had an unemployment rate, which was in excess of 14%, which was the highest we’ve had since the late 1930s. So this is serious stuff. In addition to that, of course, there are all the deaths and also the health concerns of those who get the COVID-19, even if they are recovering from it. So this is a very serious time. So, I think we should start with the idea that in fact, economics as it’s written now, has a great deal to teach us and we should be learning about that. As I see it, one of the lessons from economics that we learned in the followup to 2008 are also being applied now in terms of the idea that in this time of crisis, there needs to be massive government support for the people of course, who are displaced and for whom their income has crashed.

But there’s also a need to uphold markets so the financial markets don’t crash too. And that also is a lesson that has been learned. And as we go ahead, we don’t know exactly where it’s going to leave, but we have to keep in mind that we have to walk on these two legs. So, there’s a third leg, I haven’t forgotten about the third leg we’ve got to walk on because most people don’t walk on three legs. And that is, this is a case where we have to take into account the medical problems, and especially the medical problems which should keep this pandemic from getting out of control. And that’s a case where again, we need governments to come in and direct people regarding what to do. And we also need that with this direction, that people are going to follow them. So this is a case where expertise really matters, where the economics that we’ve learned matter, because we need that economics from having a worst crash than we already have and that we otherwise would have. And also, we need to use our economics carefully in such a way that the aid that’s given to people is targeted to those who need it the most, and where it’s going to have the most effect.

Rob Johnson:

What’s fascinating that, as you tour that horizon, the notes that I took to myself are increasing reliance on expertise at a time when the faith in the integrity of expertise, and trust in expertise has been shattered in many places. So it’s quite an awakening in that realm. Secondly, you talked about the role of government in relation to people in sickness, that which you called the third leg. And I’m reminded of the analogy to war preparation. And somewhat unlike the financial bailout of 2008 and ‘09, a lot of what people should be compensated for is staying home.

George Akerlof:

Yes.

Rob Johnson:

Because by staying home and not contributing to the contagion, they contribute to the health of everyone.

George Akerlof:

Yes.

Rob Johnson:

It is almost analogous to the what Gene Ludwig, the Comptroller of Currency and I discussed one day, eminent domain. They come to your house and you say, “We’re preparing for a war against this alien called COVID-19. And we need your farm land so we can make a runway for fighter pilots to go up and fight with the alien.” Well, in this case we’re saying you got to stay home so you don’t contribute to the chain of contagion. It’s not that you’re unfit to be employed, it’s that the extra maladies of mingling with other people and enhancing the infection is something we’re asking you to stop. And that’s a very different context than 2008.

George Akerlof:

I think I have just the right word here, the externalities. So let’s talk about how I see the economics profession and where it’s going, which also has to do with the role of INET. So economics teaches us some really good messages and now is a time when we should be paying attention to those messages. But at the same time, economics teaches us some messages when misused, which are incorrect. And one of those messages which either implicitly, or maybe explicitly sometimes, the message that it’s given to people is, if I just go out and do what I want, and you just go out and do what you want, somehow in some miraculous way it would be traditionally said through the auspices of markets, that you’re going to get a very good outcome.

The fact is, there’s some truth to that. But if you believe that message, that message of looking at people only as individuals, you’re going to miss out on a lot of economic activity and you’re going to miss out on having the right prescriptions for economic policy over a very large swath of different problems. And you’ve just, going back to what you just said, you just gave us one example of that. That example is there are people here in the United States, perhaps elsewhere, who feel that they don’t have any responsibility toward other people regarding the COVID. If they just go out and do what they want, that should be best. But that’s not the case here. The case here is, yes, if you self-isolate yourself or if you follow what the directives that are set down by the health authority, you’re not only protecting yourself but you’re also keeping other people safe.

And so this is a case of big externalities. I actually have an example of that. One example of that was with respect to smoking some 50 years ago. So the Surgeon General produced his report and it’s a famous report. I think that report can be summarized in three words. Those three words are, smoking is stupid. But then the question is, should you allow people to do things that are stupid? Well, one thing I think that in fact you should not necessarily allow people totally to do something that’s stupid. It has an externality to themselves, especially when it turns out they get cancer or other effects of the smoking. So that’s one thing.

But then in fact, believe it or not, in the State of Arizona, the State of Arizona perceived that what that meant was when people go in and they smoke in their office place, that means that people are taking what they think is right for them, but they’re inflicting it on everybody else. So there’s this question of indoor smoking. And indoor smoking violates the rights of all those other people at the workplace, or it even violates the rights of people if you go smoke at home. It’s not good for your children, it’s not good for your spouse, it’s not good for your parents if they happen to live there, etc. So there are externalities here, where there are externalities, some people should do something. So actually, the State of Arizona decided no, those people who are doing that indoor smoking, what they were doing was they were violating the rights of all the other people. And so the State of Arizona was the first State to pass laws about indoor smoking.

Rob Johnson:

Well, I think the analogy to smoking is a good one. One of the things that concerns me, as I listened to you, not just now, but a little bit earlier, was when you were talking about the need to take care of the people who are being most hurt. And one of the concerns I have about economics is it seems to have a fantasy. On the one hand, there are markets, on the other hand, there’s the state. And they’re caught in this dynamic of the state’s good and the market’s bad, which we’d call the far left. The market’s wonderful and the state just creates inefficiencies, regulation, what have you. Well, what I’m concerned about is that particularly in the United States, we have commodified social design. So laws, regulations, enforcement, appointments of leading officials are all chosen by a relatively narrow and powerful segment of society and large corporate entities. And the government’s decisions may not be particularly representative of the needs of the broad base of people, or the people who need things most. And in 2009, what have you, I think you and I both agreed we needed to do a bailout.

George Akerlof:

Yep.

Rob Johnson:

But the only feasible bailout had recognized the power of the financial sector. And as Joe Stiglitz famously said, “The polluters got paid, a lot of other people didn’t.” There was despondency. We had Occupy on the left, we had the Tea Party on the right and we had house Senate and eventually White House control change from Democrat to Republican over those eight years. So I think that the despair, the despondency, the fear of government has some validation, and I also think that large, powerful private sector entities are very good at steering the government to subsidize them or to socialize their losses and subsidized or privatize their gains. And how we construct the system of governance in relation to economic incentives, I think is a really enormous challenge right now.

George Akerlof:

So I think that there’s a fundamental problem here. I think the fundamental problem here is for some reason or other, that the American people have lost the concept that we are a we. And somehow life has become tremendously competitive for everyone, both at the top and both at the bottom. Top seems to be doing better than the bottom. But I think throughout society, everything has become so much more competitive. And so, instead of people joining together and saying, “We’re a team,” people have split apart and people are fending for themselves. So one of those things that that means is people think it’s okay to have and to earn outrageous amounts of money. But the dual to that, of course, there is the people not only think it’s okay for them to do it, they think it’s also okay for the people throughout the system to also to have to fend for themselves. And we don’t have that helping hand that people always have when they’re a member of a team.

So if you look at your dollar bill, I think it’s the dollar bill, you’ll see something on there. It says, e pluribus unum. Now, originally that meant the 13 colonies gathering together. But it was more than the 13 colonies gathering together. It was everybody in America thinking, “We are e pluribus unum, we’re fighting this fight.” And if you go back to the revolution, of course, that fight was being fought. And the people who were the soldiers for George Washington, they came from all over and it was e pluribus unum. And so I feel that we need to get that spirit back. Now, let’s now use this to transition and talk about what’s wrong with economics. Now economics have some good points, some very good points, and we have to listen to it. But one of the things that economics tends to do is attempt to look at people from the point of view of the individual. And that’s the opposite of looking at people from the point of view of e pluribus unum.

Rob Johnson:

Yes. I remember, at an earlier time, you inspired me to watch the sociologist, Ann Swidler’s video course at Berkeley.

George Akerlof:

Yeah.

Rob Johnson:

And in the second or third lesson, there was this very, very interesting discussion of Émile Durkheim. Ann talked on that day about his thoughts about the notion of what is sacred. Sacred is something that everyone together subscribes to, in belief. It becomes kind of a North star, or a guiding light. And Durkheim said but with the modern economy post-Protestant reformation, I would say early in the 20th century, Durkheim said there’s a contradiction because we’re now celebrating the individual and the individual’s freedom. And that’s an individualistic thing, that’s not a sacred thing. That there’s an instability between the collective and celebrating the individual as the collective belief. And obviously I went on and watched a lot more of that course because I thought that was such an interesting dilemma that she raised, and made very clear through Durkheim’s work. But I think you’re kind of at the, what I’ll say the crux of the issue here, which is when economics creates what you might call an imaginative pallet, where what you see is the rights of the individual, the freedom to do what you want, but without considering the rights of others not to be intruded on by you doing what you want, it’s a very odd consciousness.

George Akerlof:

Yes. Okay, so I think we should look at the consciousness that people really have. So the way economics is typically constructed is they look at the individual and they see what the individual want. So that’s called their utility. And you, Rob, you maximize your utility and I maximize mine. And then the economic system gives us some sort of agreement that between yours and mine, and that’s called the equilibrium. But the way these stories that you and I are telling ourselves, it takes a look, they mainly think about what you were doing and what I want to do. As from my point of view to what I want without my taking into account that both you and I, as we’re talking now indeed, you and I are a part of a team. And as a team, what we’re trying to do is we’re trying to accomplish something together.

So you and I are trying to give this podcast and we’re trying to do it as well as we can. And somehow this is a cooperative effort and it isn’t what you want versus what I want. It’s what we want. And so this is how everything works. So this works at the micro level, it works at any two people who are talking together.

This is how everything works. It’s how you and I are working together at this very moment. It’s how a family works together. What families want to do it’s all about the team. When you take it, it’s about the organization. Any organization, whether it is a business or a firm or a school or a nonprofit, they’re all about the team. If you get the team working together, then things are going to work out.

If you’ve got everybody all for themselves, then it’s not going to work out. That spirit is not at the very basis of economics. Where does INET come in? Where INET comes in is INET says, “Yeah, okay. There is a standard economic. It has lots of messages to tell us. It has lots of organizing principles, but there are also things that have been missed.” They’re what I call what have been missed are sins of omission.

Rob Johnson:

You wrote a paper with that title I recall. Was it in the Journal of Economic Perspectives?

George Akerlof:

No. It’s Journal of Economic Literature. It’s coming out in a few days time.

Rob Johnson:

Oh, great. We have this what you might call specification that you focus on the individual and that’s an accurate model for the analysts to best understand society. The question I want to ask you, George, is that a self-fulfilling prophecy? If you tell people you can’t play a cooperative game because you can’t trust other people, they’ll all be selfish and go from themselves, then your fallback position is to become selfish yourself even though the outcome in that fearful, pessimistic state is, how would I say, markedly less good for everyone than if you had managed to cooperate.

Are we missing opportunity by having a flawed imagination about the potential or the possibility or the benefit of collective action?

George Akerlof:

Of course. Of course, that’s right. We began this podcast we were talking about how to fight COVID and what is being done. That’s unfortunately what we’re seeing much too much in terms of how people are fighting COVID. We need it. It’s has to be a team effort in which everybody works together. We work as best as we can to be a team to do whatever teams do. Teams can be tremendously successful. Think about sports teams. The most successful sports teams are precisely that, they’re teams. The thing is that’s what we need to do with COVID, but it’s also what we need to do much more generally in the economy and also, we’re talking for our current country, as Americans. We all have to think about this as together.

Where does economics come in? For years, we’ve been teaching economics. We’ve been teaching economics on this individual basis. For some problems that works well, but there are sins of omission. Where do those sins of omission occur? Those sins of omission occur where in fact being on a team is going to matter. There’s a reason why we get those sins of omission. Do you want me to discuss that in greater detail?

Rob Johnson:

Yeah, sure. Please, please.

George Akerlof:

So where do we get those sins of omission from?

Rob Johnson:

I think that would be great if you did.

George Akerlof:

The standard way in which economists look at things is the economist in his or her ivory tower tells a story. What is the story? The story is how people are thinking when they are making the decisions they make. Economists are very good at this. They’re very clever. They talk about the stories that people make when they’re acting as if they were economists.

Now what does it mean to be acting as if you’re an economist? You have this so-called utility function. Then what you do is you go out, and the simplest example is you’re going out to the supermarket and you’re choosing between apples and oranges. Then you choose this bundle of apples and oranges, which is best for you given what you have to spend. Now, that’s the standard textbook example.

But the question is, it’s then assumed that textbook example regarding how people make decisions carries over to almost everything. But the point is suppose in fact we actually look at people and we say no. When people choose their apples and oranges or when they make any choice, what motivates them in that choice? Well, the thing that motivates people in the choice they make is always, I believe this is general, it’s always the story that they’re telling at the time they make that decision.

Think about it. We shouldn’t necessarily go to the economist in his or her office making nice assumptions about how that person would make their decisions if they acted like an economist. We should actually think about what are the stories that people are telling themselves. Now go back to some of the examples that we were talking about. We were talking about the examples like people in families. When people are in families decide what decisions they make, they think about the family as a team. When we think about people in a corporation or in a school or in the government, what are the stories they’re telling? They’re telling stories. A part of that story is how we are going to behave and how we’re going to behave within a team. That needs to be included in the economics.

Then furthermore, they are all kinds of new concepts there which then make life for the economist, actually it opens up a whole new branch of economics. It’s the whole new branch of economics, which Ann Swindler, as you mentioned, was always talking about throughout that good course that she taught.

Rob Johnson:

I am reminded I had met with the psychologist Jonathan Haidt, who’s now at NYU, used to be at Virginia. He had a book that had a chapter in it called, “How the Emotional Tail Wags the Rational Dog.” There was a poet that he and I discussed who goes by the name inquiry IN-Q, which is like inquire, but IN-Q. He had a famous saying, “A person will always find the evidence to support what they want to believe.”

George Akerlof:

I see.

Rob Johnson:

Which is slightly different than the scientific method of having the evidence-

George Akerlof:

I see.

Rob Johnson:

… convince you what was to be believed or true. It was as if your emotional gratification depended upon something that affirmed what you wanted to feel. I know psychologists have a, how would I say, rather than textured view in some of the sub-disciplines of psychology that take you to very different places than the traditional economics might.

George Akerlof:

I think that, yes. Here what our basic point should be, where we start out, should be what are the stories that people are telling themselves? What does that motivate them to do? Then we also then ask when people are telling themselves those stories, we have to ask two questions. One question is, where did those stories come from? Which is very important and that’s what you were talking about. Those people are molding those stories for what they want to do and for what they want to think. But then going beyond that as economists, and this is the type of thing that economists work on all the time, is we have to think about what are the consequences of those stories? Now they’re just elementary ideas as to what those consequences of those stories are.

Take global warming. Global warming is a really serious problem. We all know global warming is a serious problem. It’s really much more upon us than we are imagining. Every year there’s sort of a crescendo and it’s getting worse and worse. Then the question is why are people not doing what they should be doing about it? There, again, this question of what are those stories that people are telling themselves come in.

There are two problems with global warming. The first problem with global warming is that there are the effects themselves and the science tells us what we can’t do and what we should be doing to fight that. But then the second problem, and this is a problem which goes throughout much of society today, that is why are people telling themselves the stories that they are telling themselves about global warming? Then that is as much of the part of the economic problem as in fact the physical reality of the global warming itself.

Now, we can extrapolate that, we can extrapolate that. That’s just an example. We can extrapolate that to almost everything that people are engaged in. It may somewhat involve the apples and oranges because in some places people choose too many apples and oranges and by the time they get to the milk section, they don’t have the money for the milk for the kids. But we see this much, much larger problem throughout society.

This is what we should be doing. This is one of the lessons of this. It comes from what you were talking about at the very beginning. We have to sit back and in this COVID crisis, we have to sit back and think about what we should be doing and how that’s going to affect not just us, but also other people and how that’s going to be handled. That is how we should handle the redistribution in thinking about what a sensible person would do when given that that person is telling themselves the stories that they should be telling themselves rather than not necessarily the story that they’re actually acting upon. We have to do that.

Then when we think about that, it’s going to get us to act, act together and we’re going to have to try to fight this as a team. We’re not going to see that if we wear your mask out in the public is not just for the protection of you, it’s the protection for other people.

Rob Johnson:

Right.

George Akerlof:

We have to reach some kind of compromise, which is the best for everybody taking into account what we thinking about this rationally as what we would decide if we were thinking carefully and having due respect not just for ourselves but for everybody else.

Rob Johnson:

I’m reminded as I’m listening to you that in the Guinness Book of World’s Records, the shortest poem in history is attributed to Muhammad Ali who was speaking at Harvard University. Ali finished his speech and he got off the stage and one of the young students near the front screamed out, “Ali, what about a poem?” He got back up on the stage and he looked out at everybody and he said, “Me, we.” Everybody cheered. That’s considered by Guinness the shortest poem in history, but it says an awful lot.

George Akerlof:

Yes. Yes.

Rob Johnson:

It resonates with an awful lot of what you’ve just been exploring.

George Akerlof:

That’s what we’ve been exploring. Now the thing is, we take economics as a field and think about how it’s working today. In my view, economics today is doing some utterly wonderful things. Economics has developed a methodology. It’s a methodology of how you do economics. As I see it, most of the papers that are coming out are following a very particular methodology. That methodology is you make a model, a simple model, it tends to be based on economic principles. Then you test that model. People have been extremely ingenious about testing their models using data that I would have thought 10 years ago, just 10 years ago, I would have thought people would have never been able to get that data and people are being extremely ingenious.

But now, the thing is that has become the method and that has become how you’re supposed to do economics. Almost all of the papers that I see in all the major journals, that’s how they proceed. Now that’s good what they do. But just because they do this doesn’t mean that there isn’t also a that. It doesn’t mean that just because they do this, that there isn’t a very significant amount of that, which would look at the world in a very different way. Now just think about some of the things we’ve been talking about for the past half hour or so. What we’ve been talking about is what motivates people. Now that’s extremely important for almost all economic questions. What motivates me?

Well, if what motivates people are the stories that they’re telling themselves when they make the decisions they do, then that adds a question as to what are those stories as we’ve said before and how did they develop and what does that mean? What we’ve been saying all along then leads to this conclusion, that the economics has got to include what are those stories, one. What are those stories people are telling themselves? Then what does those stories motivate people to do? Then when you arrange people together in teams of people, what consequences do that have?

Now the thing is, I believe that when we look at all of the really, really, really big questions that are facing our society today and the people are finding so very difficult, that those stories that people are telling themselves and how they got formed and why they got formed, that they have huge amount of influence on that. But economics on the contrary has narrowed the stories that people are telling themselves. It hasn’t totally narrowed it to the fact that people are just concerned with themselves, but it hasn’t made that people’s stories that they’re telling and where they come from, it hasn’t yet made that the central way in which one should begin to look at an economics problem.

Rob Johnson:

In the story of economics, you have a thing called a utility function.

George Akerlof:

Yes.

Rob Johnson:

That translates into your demand, but it presumes that your wants and needs are accompanied by an endowment so that it translates into, how would I say, something that creates an incentive in the marketplace. If you don’t have any money, you have needs, but you don’t count. I find that a little bit difficult to digest because I think humans count, irrespective.

There’s another dimension which people call economic justice, in a kind of shorthand. If you’re paid more than your productivity, then you’re being subsidized. If you’re paid less, you’re being exploited. If they’re in line, it’s just fine. But what if they’re in line and the compensation for that productivity has no possible chance of creating a healthy and prosperous life for you and your family? Well, then we have to ask, where did the productivity come from? Health and nutrition and schools and other collective contextual things are implicated if the productivity of a vast number of people in the society does not allow them to have a meaningful and prosperous life and take care of their family.

I don’t even know what economic justice means unless you use the story that it’s all about your responsibility. It’s all about your talent, your perseverance, whether you stayed in school as if you can control your own fate. I think the contextual collective elements play an enormous role in how successful an economic system is. I guess what I’m saying is we’ll move to INET now, but I think some of these concepts that are implicitly within the story of the baseline economics have very profound ramifications for tolerating wrong in the name of what is right.

George Akerlof:

That’s a very profound way to look at this. Yes. So the important thing here, I think, in terms of our conversation is that people have to have an appropriate idea of we. So if you have an appropriate idea of we, then you’re going to get a just society. Now, I think one way to look as an appropriate idea of we is, the people have the appropriate mutual respect for one another.

So I listen to you, and you listen, to me. And, when I listen to you, I think that means that I get to think about what’s just for you and what’s just for me and what’s just for everybody else. And so, a good society, then, is one where people have appropriate respect for each other. So I believe that, if we go back to the American Revolution, which I’ve mentioned once earlier … We go back to the revolution.

What was taking place there was that the Americans came together, and they were having due respect for what the other people were thinking. And that’s what enabled them to fight the war and, thereby, to defeat the British. But to take that thought more generally, we’ve got to have a sufficiently inclusive view of we, actually, one that was more more inclusive than they had in the revolution. But we have to have sufficiently inclusive views of we.

And then, when we have these sufficiently inclusive views of we, then we’re going to get a more just society. So let me just give you an example of that. Two years ago, I went up, and I gave a talk at West Point, and I feel that West Point, and, actually the military more generally, has some very good aspects to them in which people learn to be an appropriate we.

And one of the things that I saw at West Point was that almost everywhere, in every building, on every wall, there was some kind of plaque to somebody who had been a hero. And so, what does it mean to be a hero? What it means to be a hero is you’ve taken into account the team that you’re on, and what you do is you do what you should do for that team. And so, that’s what makes societies work, and that is what makes firms work. It’s what makes families work. It’s what makes international relations work, that you have to think not just about yourself. You have to look at or think about the team.

Rob Johnson:

Yeah. Just as a little bit of an aside, my father had loved his time in the Navy, and I made a podcast with a guy who I met, when the Navy’s distinguished visitor’s program allowed me to fly out to an aircraft carrier and spend a couple of days on the USS Nimitz in honor of my father, at a time when I was spreading his ashes-

George Akerlof:

Oh, my goodness.

Rob Johnson:

… and off of Coronado, near the San Diego area. But they took me through this tour, and I met with the intelligence electronic type people, the mechanical people, the people that repaired the missiles and weapons, the people who worked on the landing strip when these planes took off and landed on a deck of a ship. It was just spellbinding. The technology was daunting. But the thing that struck me was I was watching men and women, people of color, all acting reverent about where they worked, all being trusted and trained, all chipping in and serving food.

But working up in monitoring and the radars and … You know, two black 28-year-old women were in charge of watching and monitoring the world for incoming threats, and they took me on a tour of this electronic gear I couldn’t comprehend. I would have had to spend six months learning it. And the vitality that everyone there felt towards each other, towards the system they’d signed up for, and towards their potential in the future was so refreshing.

And whether you think the military industrial complex is too large or too small, that’s a different debate. What these people were doing for the people that worked with them on their mission was an outstanding prototype, and I would love to see that deployed everywhere. And I’ll just say last [inaudible 00:05:22], when I got off the aircraft carrier, and I flew back to New York, I had dinner with a friend of mine who’s a black man who works with Bank of America.

And he started grinning, and he said, “Well, you know, I’m one of the big managers of the trading floor here, and I hire people that come out of Navy and have been on those ships anytime I can, because they contribute to the benefits and the wellbeing and the learning of their colleagues, and they set an example.” So what you’re referring to of aspects of the military is a beacon of light of a way to go, as you said, in organizations, in the family.

And it’s about that notion of the team. And then, finally, I’m always reminded by Joseph Campbell, the great mythological writer, who said in his book, Hero of a Thousand Faces, “Heroism is born of self sacrifice and risk-taking, not of calculation for the self.” But I think, George, you’re kind of hitting the nail on the head. So where should INET, as an organization, after 10 years looking out on the horizon, looking at climate, looking at finance, looking at the consequences of the pandemic, and looking at the core belief system that has been the story of economics, where are you urging us to go in the next chapter?

George Akerlof:

Okay, so I think that what economics is doing now is very good. But the thing is, that doesn’t mean that there are not other very good and very important messages that are being missed because it follows a somewhat narrow methodology. So I talked about the wonderful statistical work that people are doing and you see it all over the place. I’m very admiring of the people who do it, and I’m admiring of what it does. But then, the question is, does this become defined as what economics does? We should also take a look at what all the problems are in the world, and how many of these problems are something that economics could deal with, but doesn’t.

And the fact is, since economic … What you’re supposed to do as an economist is so very, very well-defined. This is one of those Achilles’s heel, but it’s just tremendously easy to aim at. And it’s just very simple. All you need to do is just look around and say, “What does it not do that it’s now not currently doing?” Now, you may have problems getting your papers published in the appropriate journals that you’re supposed to do, but that, I think, to a surprising extent in the last, let’s say, four or five years … This is where economics is turning to.

There are a number of good, truly spectacular younger people who are working on this problem of how you get economics to do this more inclusive job of thinking about motivation and this more inclusive job of thinking about how that is affecting the world. But that is what their … You have a way of looking at things. Remember we talked about Ann Swidler at the very beginning. So what do sociologists do that economists don’t do? Sociologists’ central method is to go out and they just listen to people.

They listen to people, and they take their ethnographies. And what does a really great work of sociology do? It describes how this person is thinking about the world that somehow you would have to listen very, very hard and long to what they were saying to figure it out. So it’s what there’s … It’s trying to find out what’s their story.

So now, I think, if we can look at what the stories are that people are telling, and then see where that’s leading people in ways that are not necessarily functional. People are not necessarily doing what they think they should be doing and that’s going to lead them and the team they’re on to a happy life. So you put your finger on this earlier in the conversation. Remember, you talked about the fact people are just working for themselves, and then you get a bad equilibrium in which everybody is just finding a rat race of them against everybody else.

So the real question then is, how do these stories that people are telling themselves … How do they turn out to be dysfunctional? There are all kinds of ways in which they can be dysfunctional. And so this makes economics so much more interesting. It’s not just more interesting. It’s also more right, and it also takes into account so many of these things that are sins of omission. So let me just add something to this. Okay?

So Danny Kahneman, who always has been saying wise things for a very long time, said that psychology was about how people had dysfunctional beliefs, and they had a model of the world that didn’t really quite make sense according to how a scientist would approach that. So that, he said, was the fundamental thing that psychologists worked on. And Danny has been very successful at this, in bringing in what’s now called behavioral economics.

But then he said something else that goes beyond this. He said, but economists have something that goes beyond what the psychologists have. They have this concept of equilibrium. Now, the fact is, then, that equilibrium in this realm is something very different from the standard equilibrium in economics, in which supply is equal to demand. So, in this new realm, what break comes into this equilibrium, is what are the stories that are people are telling themselves? Now, then we get a wonderful new equilibrium. What’s very important, it affects lots and lots and lots and lots of things.

So the story most people want to tell … If we’re on a team, I want to be telling the same story that other members of the team are telling. So I want to, say, have the same story that you’re telling. So just think about our podcast. I want this podcast, that you and I are going to be telling some kind of coherent story. I’m working very hard at it. Maybe you are, too.

So we’re trying to tell this story. And so we have an equilibrium. We’re hopefully getting an equilibrium in which I’m telling a story that you would like me to tell, and you’re telling a story or asking questions that you want me to tell. So we get this equilibrium. But these stories, then, are generated by equilibria of people telling themselves stories that the people they associate with want them to tell. And then those are the stories that they also want to tell themselves. So that’s very, very important, that you get these equilibria, and somehow you can go from equilibrium where people were telling dysfunctional stories … Dysfunctional stories, as you said, in which people, everybody’s fighting with each other and going out for themselves.

But, on the contrary, you can get really great equilibria. Remember, you talking about the aircraft carrier. What were those people telling? They were telling a wonderful story about where they fit in to this organization and where they fit into the team. And they were all telling them the same story. Now, this is what we need to bring into economics. And, in fact, there are some very, very good young people who are working on this. And, in fact, I don’t know whether I should mention this here, but INET has given quite a bit of support to these people. And there’s a group who’s working on this. So this is just one of the projects of how you can change economics.

So, there are two basic elements to that. One is, you have to broaden the stories that people are telling when you write economics, stories about how you work in an organization, how you work in a firm, how you work in a family, how you work in a country, how you work within your organization in the government, like being a member of that aircraft carrier.

And so, all of these, you bring them in, and it’s very important. And then, that’s one. You wanted to get those stories there. But then, if you want to add to those stories, you want to add the fact that … Danny was talking about what does economics contribute to this. One of the things that economics contributed to this is the idea of an equilibrium.

So, remember, I was talking about West Point and then you talked about the aircraft carrier?

Rob Johnson:

Yeah.

George Akerlof:

So one of the things that’s going on at West Point is they have developed at West point a system where somehow, by some degree of magic or other, somehow everybody considers themselves to be on the same team. And you see that. All those heroes, those statutes and those plaques and so forth, that’s what they were working on. They were all designed to make people think they were being on the same team, and then they have gotten marvelous, some truly marvelous results from that.

And that’s what we should be looking at, not just at West Point, and not just in the armed services, but that’s something we should also be working for in our more general lives. And I think there’s a name for this, actually. I think that one name for this is community, but I think we should think about this as communities that we need to have work about how our communities are going to work so they work for everybody and that we don’t have these exclusions, which we’ve always had, through our history and we still now have too much of. And we have to work as to how to work together.

Rob Johnson:

Yeah, there’s … But by the way, in my own life, I worked very intentionally for a while with the documentary filmmaker, Alex Gidney. And we made a film called Taxi to the Dark Side, which was about the use of torture and about the way in which forced interrogation was not particularly revealing or helpful. People basically tell you what they think you want to hear to stop the pain. They don’t tell you any truth.

It’s not about like a confession. Well, one of the places that was most enthusiastic about the fact that we were making this movie was West Point-

George Akerlof:

I see.

Rob Johnson:

… because the cadets could see that when they went into service, if the United States practiced forced interrogation, guess who was going to experience forced interrogation when they became a prisoner?

George Akerlof:

Yes.

Rob Johnson:

There would be reciprocal hostility, and they were very lucid and taking care of each other by helping us make the arguments that were important in that film. So there’s quite a bit of spirit there. I’ve also … And this is less, how would I say, associated with any official thing, but I’ve done some speaking at Naval War College and some speaking at West Point, and they often viewed themselves as public servants. And, given my background from the hedge fund industry for a period of my life, they talked to me very openly about their resentment of how investment bankers and private equity officials either hover around the Beltway or go into the Cabinet in order to do things for their firm, not for the American people. And so there’s quite a lot of energy about these collective questions and what’s a family and what’s the community and what’s inclusive that is embedded in every experience I’ve ever had with the military and its education system and what have you.

Rob Johnson:

But George, I’m also very interested how you’re, … You’re exploring. You and Rachel Kranton wrote a book called Identity Economics, which leads right into all of these questions. I remember, when you and I first met, I had just been reading a scholar from Stanford whose name was René Gerard, and he talked about a theory he had called mimetic desire, and it was related to … Actually, he wrote his PhD. He’s no longer alive. Gerard wrote his PhD, I believe, in Indiana. And the book was called Deceit, Desire, and the Novel, and his goal was to pick the great novels and organized so that a psychologist could understand, or an anthropologist could understand, the characters that were most revered in history. Because when you read the book, you could feel yourself in that context and what kind of things that they did. And I guess where… I just met Gerard a couple of times in my life, but he had a group around him called Imitatio that has appeared in some of the INET conferences and they basically said people care about what people they admire, want, or desire. They’re getting what called mentoring or filtering from following people they think are wise. They emulate those people.

I guess what I’m getting at is they formulate their preferences dynamically through human interaction. It’s not some frozen icy thing that’s not susceptible to marketing and advertising. It’s not something that doesn’t relate to what your friends think of you or what your family members think of you.

Where I’m going with this is the psychology of what you desire is embedded in the psychology of what teams and what collective things you want to be part of and belong to. I don’t see these as separable and I think this is a false consciousness again, that the frozen icy preferences translate into demand and the market serves your desires. There’s an element of truth in that, but where do preferences come from?

George Akerlof:

Okay. I guess you know that you’re giving a very good example. So it seems to me that the head of almost every organization, or at least almost every organization that works well knows that one of your major jobs, perhaps the major job, is you were supposed to be setting the example as to how everybody else in that organization is supposed to behave. [inaudible] that example, and then what people do is if they don’t behave that way, they feel ashamed or guilty and they think they should have done otherwise.

But then the second thing is economics is very big on incentives. This is the standard economics. We talk about incentives. I’ve heard the economists say, “What is economics all about? Is all about giving people the right incentive.” But when you think about it, then the question is you give people the right incentives.

Some of those incentives are typically punishment. So lots of standard economics is about if people don’t do their duty, if they don’t put in the effort that they were supposed to put in, that’s the standard model of unemployment. Then in fact, those people are fired. They are punished. It seems to me that life is more complicated than that.

So go back and think about West Point. At West Point it has a very severe punishments for people who disobey the rules, especially if you cheat. And those rules are very firm. But the thing is that what economists take from that is, yes, in a good organization and a good organization works, it works because you’ve given those incentives. But on the contrary, what’s the reason why those incentives work? The reasons why those incentives work is because the people who disobey, who are disobedient, they are people who are not being full members of the team. And that’s why those punishments when they’re given, they’re legitimate.

So there’s this interesting thing where you have a very nice equilibrium. You have a very nice equilibrium in which in an organization that works, the people believe in the organization and they believe that they should do what the organization wants. Why? Because we’re part of a family.

But then the question is, what about incentives? What about the punishments? The answer is when you have that situation, then the incentives are just natural because if the people are not doing what they want and there are rules that people should be punished, then in fact those punishments and those rules have legitimacy and they can be enforced.

So if they can have an organization that’s doubly strong because they have both the incentives to work, but also you have the key thing. The key thing is that people identified with the organization and that means that those incentives and those punishments have legitimacy.

So it’s really interesting because what the economists are predicting here is true. The incentives are there and they work, but they’ve got the reason for the incentives wrong and what those incentives are doing. Those incentives are playing a multiple role.

Rob Johnson:

Yeah, that’s fascinating. That’s fascinating. So let me just ask you a question that I’m often asked, particularly by younger people. The suppleness in the research of people like yourselves and other leading scholars gives people confidence that there are people out there who are shedding light, making progress and doing things for the betterment of mankind.

But they don’t see much of the nuance of work like yours introduced in the textbooks. So what many of the young scholars say to me is that the researchers can be subtle, supple, insightful, but economics only a very small people who take economics become economists and most of them become businessmen, lawyers, public servants, journalists, influencers, what have you. How is it we’re going to change so that we’re not indoctrinating society into the legitimacy of a false consciousness and bring that more textured economics to life for a broader range of the public who collectively then change the nature of what we strive to achieve as a society?

George Akerlof:

Okay. So I think this is like there is this huge wheel and we have to roll it up the hill. And so what do we have to do? We have to have faith that we can do it and we have to do it all together. And we shouldn’t have the short run idea that this is going to happen in the next 10 minutes. Not going to necessarily happen in a day, but if we’re all out there and pushing this wheel and there are a lot of us pushing the wheel, yeah, we may get it up the hill.

So I think our worry shouldn’t be whether the wheel gets up the hill, what we should be worrying about is that we’re doing the right thing and we’re trying. And if that’s the way you are and you don’t worry about whether you’re actually going to get there or not, but you know that that is the right thing to do, then that’s what’s going to get you there, probably. As an optimist, I’ll say probably you’re going to get there.

I feel that if one looks at the history of science, we see lots of examples of people who decided they were going to go out there and they were going to push that wheel. And it didn’t matter whether other people were pushing the wheel or not, but they had this faith that if you did this and you got it right and it really looked right, in some point, people were going to turn around and they say, “Gee, that might be right.” So the one I like most, my hero in all this is Copernicus. So Copernicus was living up there in Northern Poland, which at that time was still in forest and you could go out at night and at night what you’d see is you’d see these stars up above and what would you hear? You would hear the wolves in the forest.

And so now you he had this notion, this really crazy, crazy, crazy notion that it wasn’t those stars that turned around every night and circled the earth. Rather what was happening was the earth was turning around every single day and he had this view and he worked on it. And then some great student, I think from the Netherlands, but I’m not sure, decided that he was a really good person and that they ought to write up a book which gives Copernicus’ ideas.

This is pretty much at the beginning of printing. And so they printed this book, this acolyte of Copernicus, and they printed this book and he brought it to Copernicus and he handed the published book to Copernicus on the day he died. So we’ve got to be up there even if we see these things that we think are not right, we just have to pursue them. And then we hope, because we’re part of this endeavor, we’re part of this endeavor to see that people are going to believe the right thing and we hope that we can make a contribution. And if we don’t, that isn’t going to be our regret, our regret would have been that we didn’t try.

Rob Johnson:

So Copernicus trumps Sisyphus in the scheme of things.

George Akerlof:

Yes. Right. Exactly. Yeah.

Rob Johnson:

Well, I think these kinds of questions are at the core of what INET has explored in many cases with your guidance. And I think that you’re right, that there are large number of young people. Your ERRIN program, the Economic Research and Identity Norms and Narrative, is a great place for people to connect up to and to how I say, invigorate their hope. Go on the journey. And as you emphasized in many contexts in this conversation, you need partners, you need community. It fortifies your conviction, gives you people that can disagree with you in a loving way and helps you evolve.

So I think The Beatles once wrote a song that got out a lot of this that is plaguing this individualistic economics and the name of the song was What You’re Doing. It says, “Look what you’re doing, I’m feeling blue and lonely. Would it be too much to ask of you what you’re doing to me? Please stop your lying. You’ve got me crying. Why should it be so much to ask of you what you’re doing to me?”

Well, George, I can say that no one in the first 10 or 11 years of INET has done any more than you have to further our mission, to encourage us and to push us further down the tracks to maintain our conviction. The word courage comes from Latin cor is heart and age is your time or your story. And courage meant to tell the story of you with your whole heart. And you encourage meaning compel or inspire or as an example, lead us to keep working on that story. And I’m very, very grateful to you.

George Akerlof:

Oh, thank you very much. So I’m very grateful for INET to be giving me this privilege. And I just think this is an extremely important mission and we see it every day. So we see it every day with the growth of the new nationalism. We see it with denial of think of policies that we have to do, such as fighting of global warming, such as fighting against bigotry in every form and so forth.

And I feel economics can and should play a greater role in this. And I feel that one of the things that INET is doing is it’s unleashing people to be able to fight that fight in a way that’s going to be very helpful to lots of people. So let’s just talk for a second about public policy. So one of the major jobs of public policy is to devise the policies that are going to be most effective.

But the second major job in public policy, I think you alluded to that in the very beginning, was to make those policies that we should be doing to let them have legitimacy. And so I think we need a broader economics in order to give legitimacy to public policies that play that role. So let me give you two words, one of which you’ve mentioned earlier, maybe both. One word that’s very important is caring. We should be caring. That’s one of the things that economists should be teaching people, that we should be caring of others. That’s good for the other people but it’s good for ourselves because that’s what makes us think that we’re leading a good life. And you referred to that, you referred to that what are those people doing on your aircraft carrier? What were they doing? They were caring.

And the second thing is not just caring, but this question about legitimacy, that this is something that policy makers have to care about too. That somehow it’s not just we should be more caring, it’s also that we have to think about what is going to make those policies that are going to be right and are going to take us where we should go do that. Those have to be legitimate.

And so just name the major problems that we have in the world and there are lots of big ones. There’s global warming, there’s the possibility of financial crash and moving into a great depression, which we’re worried about as just today as we speak. There are all kinds of problems of inequality. There are all kinds of problems of interracial justice and gender justice and the list simply goes on. And if we’re going to fight those problems, which we should be doing. And I know a lot of economists and a lot of other people who sincerely are fighting, doing this fighting. I think we have to realize that these things have to be done and we have to be considered legitimate too as economists.

Rob Johnson:

Well, I think that’s a very… Caring and being cared for. Both are very important. And I think that, how would I say, what was Alan Blinder’s book? Hard Heads And Soft Hearts?

George Akerlof:

Yes. Right.

Rob Johnson:

Well I think he’s right on the money there. And one of the things that you bring to bear is that delightful combination. So I think we covered a lot of bases today and like I said, not surprised, but delighted to be able to spend this time with you. In a few months, we’ll come back again for another episode. We’ll explore, but hopefully the pandemic will have receded a bit in importance and we can focus on what we’ve learned between now and then. But thank you for being here today, George, and I look forward to next time.

George Akerlof:

Okay. Thank you. It’s been a great pleasure.

Rob Johnson:

Bye-bye.

George Akerlof:

Bye-bye.

About the Host

ROB JOHNSON serves as President of the Institute for New Economic Thinking.

Johnson is an international investor and consultant to investment funds on issues of portfolio strategy. He recently served on the United Nations Commission of Experts on International Monetary Reform under the Chairmanship of Joseph Stiglitz.

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About the Guest

GEORGE AKERLOF is professor at the McCourt School of Public Policy at Georgetown University and Koshland Professor of Economics Emeritus at the University of California, Berkeley. He won the 2001 Nobel Prize in Economics (shared with Michael Spence and Joseph E. Stiglitz).

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