Learning from sociology

As a partial mea culpa to Will, a link to a post from the orgtheory.net website: what economists should learn from sociology (hat tip: Tyler Cowen).

I was giving a talk about my research on the politics of the anti-war movement at the GMU econ department’s public choice seminar. At lunch, my good friend Bryan Caplan and his colleague Ilea Rainer asked me: what are five things that economists should learn from sociology? We didn’t get through all five, but here are three that came up:

1. Sociologists have a deep appreciation of imitation and conformity as a basic feature of human behavior. Economists rarely model this explicitly. If it is so important, as sociologists have shown, then economists are really missing the boat.
2. Social networks/social structure matters. Simple idea but few economists sit around and model the effects of social structure. Usually the best you get is a recognition that “norms” matter. My argument is that economists should care because social structures produce opportunities (e.g., you hear about jobs through networks). Most models assume that information/resources are out there but few wonder or model how networks/institutions create them.
3. Collect some real data. Most economists are “data downloaders.” They are afraid to get out there and survey or observe people, which limits your questions to what major data sets have asked. Experimental work is an improvement, but it is still a highly artificial construction. Go out and observe some markets with your eyes and get your hands dirty. Live a little!

What would you add?

See also my previous post: "The economy is social". Discuss

Comments

[Will Davies]

I guess I should say 'thanks' for the mea culpa, and obviously I'd argue that an economist who listens to sociologists is better than one who doesn't. But I think there is a latent hostility between the two schools that can't be got rid of very easily, which starts with their respective methods. From where I (and various sociological colleagues) stand, the task of economic sociology is to reinsert social phenomena that economics has deliberately excluded (or bracketted as 'externalities'). That is, economic sociology from Polanyi onwards defines itself partly in terms of providing a counter-narrative to that provided by economics. If economics had not drawn a division between 'economy' and 'society' in the first place, then there would be no need to talk about the embeddedness of the former in the latter.

For this reason, economic sociology will not provide evidence in a form that can be easily inserted into existing economics. It will deliberately provide evidence that is too historical, too contingent, and too messy for it to be more than of passing interest to economists. One of the comments added to your previous post stated that "There may very well be a sociological aspect to economics that is waiting to be discovered. But, there is also no Generalized Theory of it pointing its pretty head on the horizon." Of course there is no generalised theory of social action; the desire to have one is part of the problem!

I think the desire for cooperation between the disciplines is to be welcomed, if it occurs on neutral territory (whatever that may look like). But where sociologists are judged useful only to the extent that they can flesh out or add to various 'laws' of human behaviour, it is difficult to imagine how they can cooperate while remaining sociologists.

[Lafayette]

WD: "Of course there is no generalised theory of social action; the desire to have one is part of the problem!"

Interesting that you should dismiss this idea out of hand. I can't imagine why.

Macro-economics aggregates individual behavior because it addresses economic phenomenon on a national level. It cannot be blamed for doing such; that is its purpose.

Micro-economics, o.t.h, specifically looks - or should look - at individual behavior of consumers towards understand why and how they consume or do not consume. Consumers are the alpha and omega of ALL economic theory, both macro- and micro-.

But, there is little done on the micro-economic level. One must ask why - and, please, the bit about "personal incompatibility" between the two camps simply wont do. There is much that can be learned if the two get together and, in the interest of science, it seems silly that they don't.

After all, consumer behavior is not all that diverse. Given that people have enough money, they will spend it, which keeps the economic cycle going. What makes them spend rather than save, or invest rather than spend, or invest rather than save - or vice-versa in all three examples. If you ask these questions of economists, they will blithely remark that it is a question of rational choices (based upon the better gain or "propensity"). This is logical, but it does not sufficiently answer the question.

Some societies save more than others. What makes them "unsave". That is, what is it about, say Europe, that had a high savings rate at one time early in the post war reconstruction years. The savings rate started to come down in the late eighties and nineties ... to where in some instances today it is often negative in some socio-economic cases.

What sociological factors would explain the shift in savings patterns? That is the sort of question I would expect both sociologists and economists to develop into a "general theory" of consumer behavior.

It ain't rocket science. (And, if it were, we'd have it well-defined by now.) It is altogether more difficult.

[Acad Ronin]

Some time ago I asked a friend and colleague who was a sociologist whether there was any central paradigm to sociology that might parallel constrained optimization for economists. He thought for a bit and then answered "unintended consequences".

I would also add the utility of relative position and performance (rather than absolute wealth), though in recent years economists are starting to add that to their models.

[Charles Butler]

I ask the same question as Lafayette. If, in the U.S. for example, inflation is controlled, why is the savings rate negative? Being a believer in simple answers (simpleton, perhaps), my conclusion is that people are spending their excess earnings on stuff that makes them feel sufficiently integrated in the social order, that being a most fundamental human necessity. After all, does a better car transport you better to point B? Or does a better TV affect the content available on it?

This small suggestion, of course, renders inflation stats meaningless because the cost of living becomes what it costs to achieve that goal - increased quantity of purchases substituting for price increases in our day.

[Lafayette]

CB: "If, in the U.S. for example, inflation is controlled, why is the savings rate negative?"

I didn't know that "inflation is controlled" in America. I think that might come as a surprise to Bernanke ...

Why is the savings rate negative? Because savings as measured is negative. Why? Because Americans discovered the stock market and changed their placements. Equity-savings (my word) is now a major source of savings investments, replacing T-bills and even corporate bonds. Even nations do it on a large scale.

Long-term rates on equity funds are greater than any savings placed at bank rates by a factor of 2, 3 or 4, depending upon the country (and the tax on savings versus that on capital gains).

Also, with the run up in asset inflation (mostly realty) cupidity took hold as a good many people made money by flipping condos ... of course, those who persisted in this extremely risky business (in hopes of making a quick million) now find themselves in a bind, if not virtually penniless. That is, they borrowed to the hilt to purchase ever more expensive properties in hopes of flipping ever more profitable real estate.

With the slackening of realty prices stateside, they are now in a negative investment position (the value of property is less than the credit borrowed to finance its purchase). They are spending everything to maintain that position (pay their credit) and so savings, even traditional, will suffer.

They are literally running in place ... and serves them right. Methinks.

[Charles Butler]

Lafayette,

A 2.5% inflation rate is 'controlled', especially if the environment is one of flagrant consumerism. That investment in assets has substituted for savings kind of covers it, but not entirely. Though, if it's the case one would have seen a runup in the savings rate at some point during the long bear market. There's a blip, but only a blip. The rest is just a continuation of the downtrend that started at the end of interest rate shock of the early '80's. And you can't argue that investing in real estate is a direct substitute for the stock market - unless you're talking round lots of Berkshire Hathaway.

A, so to say, anthropological angle on the phenomenon may shed more light on what is inflation and what isn't. Cargo cult economics, say?

[Lafayette]

CB: "And you can't argue that investing in real estate is a direct substitute for the stock market"

They may or may not be substitutes, it depends upon the choice made. In terms or liquidity they are alternatives, houses being less liquid than stocks, but ordinarily less price volatile.

It is unwise to put all one's eggs in any one basket, so people put some of them into real estate, others into equities and still others into bonds. This spreads the liquidity and risk and return.

All three together make for the household "savings omelet".

What remains to account for is profits. It is somewhat of a riddle that healthy corporate profits in the past five years have not shown up in bolstering the overall savings rate. Don't you think?

[Charles Butler]

Lafayette -

In two words - dividends and buybacks, both putting money into the hands of non-savers and simultaneously putting a floor under stock prices and keeping them attractive as investments. This not to mention that any underleveraged corporation with lots of cash on hand immediately becomes undervalued and thus a target of private equity and the like.

But we begin to digress...

[Arthur Eckart]

There are economic reasons why imitation and conformity are important. There have been many economic studies on asymmetric information. Economics already uses real data and observe markets. The contributions of economics, over the past 200 years, have been most valuable to society and there's much more to discover.

[Lafayette]

CB: "This not to mention that any underleveraged corporation with lots of cash on hand immediately becomes undervalued and thus a target of private equity and the like."

Yes, but the flip side of this coin is that private equity companies are put off only when a company has enormous debt.

It seems a bit silly that a publicly quoted company should have to defend itself from these "locusts" (not my word, but that of German Finance Minister).

I personally think PEs do a great deal of good, rescuing companies that would otherwise go bankrupt. If they unlock value, who is to blame them for having done so? Well, politicians it seems.

They don't like that jobs are lost. But, jobs will be lost anyway. I don't see how scavengers like the PEs, who are simply doing a job, should be pointed the finger for capitalist economies that are run ineptly by politicians.

I've always wondered why I never heard/saw a politician who had even the most basic notion of economics. What they know best is how to worry about the next election.

In Europe, for almost every country that found itself in an economic mess, the principal factor was politicians who promised more than the country's generation of wealth could afford.

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