Monday, February 7, 2011

Speaking of epicycles...

James Kwak has a beautiful stone-by-stone dismantling of this paper by Bryan Caplan and Scott Beaulier.
The paper argues that welfare programs expand the set of choices available to people; while that is all good according to traditional economics, if we think that people are inclined to make bad choices (“behavioral economics”), then welfare programs give people more opportunity to make bad choices and hurt themselves. This is particularly a problem because, they claim, “there are good empirical reasons to think that behavioral economics better describes the poor than it does the rest of the population” (p. 4). In other words, if poor people are more irrational, then giving them more choices will hurt them more than other people.
Kwak takes it all apart, from the odd and strangely uninformed take on behavioral economics to the lack of supporting data to the ready supply of superior alternative hypotheses to the generally poor quality of the authors' reasoning. If this zombie claws its way out of the grave after Kwak is through with it then there's just no killing the damned thing.

One thing that is obvious from this paper is that Caplan and Beaulier have reached the epicycle stage.* They are no longer focused on finding the best model to fit the data; instead they are trying to salvage an intellectual framework that is based on elegant principles and appealing ideas like just desserts and efficient markets.

The shift from serving the data to serving the theory is easy to make and difficult to catch. Every new theory occasionally runs into a phenomena it has trouble explaining. Explaining them can be a good thing. The process of taking a theory into the counter-intuitive is an important, even necessary step in its evolution.

There is, however, one condition: the explanation you finally come up has got to be as good or better than any of the alternative hypotheses. Otherwise, the theory isn't evolving; it's decaying.

* The Wikipedia article on the subject suggests I'm being unfair to Ptolemy. I hope not -- I'd hate to have to come up with a new analogy.

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