Zoo Station

On his blog, Dani Rodrik dives into why economists differ so much about so much. He thinks the answer lies in the fact that there are two genres of economists, economists who believe in a first-best world and economists who believe in a second-best world.

The gut instinct of the members of the first group is to apply a simple supply-demand framework to the question at hand. In this world, every tax has an economic deadweight loss, every restriction on individual behavior reduces the size of the economic pie, distribution and efficiency can be neatly separated, market failures are presumed non-existent unless proved otherwise (and to be addressed only by the appropriate Pigovian tax or subsidy), people are rational and forward-looking to the first order of approximation, demand curves always slope down (and supply curves up), and general-equilibrium interactions do not overturn partial-equilibrium logic. The First Fundamental Theorem of Welfare Economics is proof that unfettered markets work best. No matter how technical, complex, and full of surprises these economists' own research might be, their take on the issues of the day are driven by a straightforward, almost knee-jerk logic.
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Those in the second group are inclined to see all kinds of complications, which make the textbook answers inappropriate. In their world, the economy is full of market imperfections (going well beyond environmental spillovers), distribution and efficiency cannot be neatly separated, people do not always behave rationally and they over-discount the future, some otherwise undesirable policy interventions can generate positive outcomes, and general-equilibrium complications render partial-equilibrium reasoning suspect. The First Fundamental Theorem of Welfare Economics is proof, in view of its long list of prerequisites, that market outcome can be improved by well-designed interventions. Since they have given up on the textbook model, members of this group have an almost-infinite variety of "models" to choose from as they think of public-policy issues.

The first group's instinct is always to apply the first-best reasoning to the case, ignoring market imperfections in related markets, while the second group almost always presumes some market imperfections in the system. I am over-simplifying a bit, but not a whole lot.

Who belongs in what category, you ask? Here is the surprising bit. According to Prof Rodrik, Gary Becker, Greg Mankiw, Brad deLong, Jagdish Bhagwati, and Tyler Cowen fall into the first category, while George Akerlof, Joe Stiglitz, Paul Krugman, Alan Blinder etc fall into the second category. Now, I can understand why he would think that way about Becker, Mankiw and Bhagwati, but I have always thought of Tyler Cowen and Brad as economists who really do take imperfections into account. It's an interesting read, though I very rarely agree with Prof Rodrik these days.