MM: Baron Byron, I know that we economists follow the Queen of Social Sciences and are extraordinarily smart when compared to… you know whom. Are we sometimes too smart for our own good? The other day, I spoke with a fellow economist about the shortage of servers in restaurants in my city. He said the solution was simple and that they should raise the wages. Is that simple? Why didn’t the restaurant owners do that already? Don’t economists always assume that people maximize utility given the constraint? What is the point of economists being smart ass and telling people to do this or that?
BB: Master Ming, I have something similar going on in my little town too. As an economist who is a bit more humble (or timid), I try not to tell people what to do but try rather to understand what is going on. Things happen for a reason, and there must be something behind restaurants looking for workers. Similarly, we do see people line up for food at restaurants. Why don’t they just raise the price then?
MM: There are variables besides prices, and constraints in the real world are never obvious. The good restaurants I know only hire good servers. Bad servers give managers headache and the restaurants bad reputation.
BB: And business owners know a lot more about those constraints than we do.
MM: Really? (Mouth opened in shock!) So how useful are we? John Muth, who inspired Robert Lucas and the school of rational expectation, said that businesses must be operating with a model as good as those developed by economists, or else they would have hired a lot of economists! For many years, economists mostly work at the governments, central banks, and think tanks.
BB: Businesses need to know more than economists or they would not have survived! The fact that some businesses exist mean that they are doing something right, by accident or not.
MM: But things are changing. The tech industry has begun to fall in love with economists. Take Uber for example.
BB: Now the world has changed! They are all over the place at tech companies.
MM: What is your take? Why were economists not used by the private sector until the last couple of years? Have we become “smarter” than businesses? Or do businesses get “smarter” and know how to use economists?
BB: I still think economists are hired not because they know how to do business. Economists are useful as they know how to work with data, lots and lots of data. They are able to identify patterns, and such businesses gain by exploiting these patterns. Those restaurants you mentioned earlier probably do not have much data to exploit.
MM: You mean economists are more like accountants in the big data era? Accountants do not run businesses, but businesses need accountants. Accountants can be inventive with numbers on a balance sheet; economists can be inventive with numbers on a spreadsheet.
BB: Yeah, so try not to say you do econometrics, and say that you use machine learning to work with big data!
MM: With big data, the traditional foundation of statistics is shaken. William Gosset’s problem was a small sample problem. Now tech firms have close to the universe of data. What’s more? They can do immediate experiment with tweaking the prices, etc. in real time.
BB: Yes, and there are economies of scale here. More customers mean more data, and more data mean more reliable understanding. More customers also mean more room for experiment as you mentioned.
MM: In other words, it’s not that the superior intelligence of economists is finally appreciated. Rather, just like most interesting economic phenomena: a matter of chance!