On control and state variables

More challenges to conventional wisdom in Economics.

Boston, 1639. In his magnificent book The wordly philosophers, Robert Heilbroner describes how a minister uses his sermon to denounce some of the false principles of trade. Which are those “trade sins”? Quoting from Heilbroner’s book:

I. That a man might sell as dear as he can, and buy as cheap as he can.

II. If a man lose by casualty of sea, etc. in some of his commodities, he may raise the price of the rest.

III. That he may sell as he bought, though he paid too dear…

More disconcerting historical examples.  In The Protestant Ethic and the Spirit of Capitalism, Max Weber relates the problems faced by employers that tried to implement “capitalist incentives” on laborers still influenced by what Weber calls  “traditionalism”:

“A man, for instance, who at the rate of 1 mark per acre mowed 2 1/2 acres per day and earned 2 1/2 marks, when the rate was raised to 1.25 marks per acre mowed, not 3 acres, as he might easily have done, thus earning 3.75 marks, but only 2 acres, so that he could still earn the 2 1/2 marks to which he was accustomed. The opportunity of earning more was less attractive than that of working less. He did not ask: how much can I earn in a day if I do as much work as possible? But: how much must I work in order to earn the wage, 2 1/2 marks, which I earned before and which takes care of my traditional needs? This is an example of what is here meant by traditionalism. A man does not “by nature” wish to earn more and more money, but simply to live as he is accustomed to live and to earn as much as is necessary for that purpose“.

Professor Fatas, from the University of Valencia, comments me that the so-called aspiration levels are still observed in our days (see, for example Camerer et al (1997):  “Labor Supply of New York City Cabdrivers: One Day At A Time“, QJE). The basic idea of this paper  is that taxi drivers in New York work having in mind a target level. Once it is reached, they stop working. This contradicts some standard assumptions on wage elasticities.

Far from being intellectual curiosities, I think that these facts give two -apparently contradictory- lessons for economists: they should be both humble and ambitious in their research. They should be humble given that we have seen how our dear homo economicus is an intellectual construction describing a very precise historical state of human nature. Unfortunately for researchers dazzled by “hard sciences”, truth in social sciences is a disturbing unstable concept. Our previous texts can also lead to a more ambitious research: by challenging some of the most widely accepted hypothesis and established facts in (Micro)Economics new options for research can be explored. The old exogenous state variables become control ones…