The End of Rational Economics?
Question: What challenges does the discipline of economics face?
Paul Krugman: I think the biggest challenge is that the method that has worked so well for economics is probably close to its limits. Economics has gotten a tremendous amount of mileage about . . . by saying what would a rational, self-interested person do? That has been the core. And for very many things, that has been a very productive way. You learn an enormous amount, and it serves as the basis not just for abstract theories, but for actual empirical analysis of behavior and of policy. But in a way we’ve sort of done what you can do with that, and more and more the key issues in economics are . . . involve the limits of rationality; involve the places where people don’t have the ability to assess all of the data they have where people are . . . don’t make rational choices.
So you know there is a rapidly growing field of behavioral economics, which is basically . . . What that means . . . Isn’t all economics behavioral? But what that means to the economist is that means okay, we . . . people are apparently not maximizing the utility function the way economists like to assume – which is a very, very good way to understand a lot of human behavior – but they appear to be doing something else. So all of those approaches – trying to understand what people actually do – that’s behavioral. And . . . and we’re learning a lot. It’s more of . . . It doesn’t have a single . . . You know it can’t be summarized in 10 words, which is why it wasn’t done first. But I think we’re learning a lot. So that’s the research program. It’s fine. Boy, influencing policy, you know that’s the .... You push it up a little bit it comes back down. Each generation has to do its bit. I don’t think there is any . . . There will never be a point at which good economic analysis is automatically incorporated into policy. It takes each generation to try and push it.
The Nobel Prize winner says economics should move beyond the limits of 'rational self-interest.'
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