Go Schelling, It’s Your Birthday…
I actually gasped when I awakened this morning and saw this. Thomas Schelling, winner of half of this year’s Nobel Prize in Economics (note to the sticklers: yes, it is technically the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel– it’s awarded by the Nobel Foundation, get over it), was the author of the first book in theoretical economics that I ever read. It’s a clear, easy read entitled “Micromotives and Macrobehavior”, and in it, he shows (among other things) how relatively weak preferences can lead to complete racial segregation. It certainly opened my eyes to an entirely different way of looking at problems. The Nobel announcement cited his most famous work, which addressed conflict strategy in general and nuclear deterrence specifically.
For more information about Schelling, there was a great interview with him in last spring’s Richmond Fed “Region Focus”, in which he makes a great point about dissent and agreement within economics:
“I claim that we couldn’t do without rational choice. But we don’t expect rational choice from a child or an Alzheimer’s patient or someone suffering from shock. We will better understand the uses and limits of rational choice if we better understand those exceptions. I use the example of the magnetic compass. It’s usually a wonderful way to determine which direction north is. But if you are anywhere near the actual north magnetic pole, the compass could point in any direction, even south. The same is true with rational choice. It is a wonderful tool if used when appropriate, but it may not work all the time. So I consider myself in the rational-choice school, absolutely. But I am more interested in the exceptions than many other economists tend to be.
“As for the behavioralist critique of neoclassical economics, I would conjecture that if you walked into a classroom where a behavioralist is teaching microeconomics, that person would teach it in a straight, standard fashion. It’s something that you have to master — you can’t do without it. For instance, if a student were to ask about the effect of a gasoline tax on driving behavior, the response would likely be that such a tax will tend to lower consumption of gasoline and/or increase the desirability of more fuel efficient cars. That’s just straight neoclassical economics.
“More generally, I think that when a new idea develops, it is important that the enthusiasts are given free rein to explore and perhaps even exaggerate that idea. Once it catches on and becomes respectable, then it’s time to become more critical. Rational choice has gone through that process, and the behavioralists have emerged to challenge some of its assumptions. The behavioralists have probably overstated their case, but their ideas are relatively new and will be critiqued as well.”
Tyler Cowen also has a bunch of links up to (his former mentor) Schelling’s work in a variety of areas.