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fall2011

Culture in Economics and the Culture of Economics:
Raquel Fernández in Conversation with The Straddler

On October 17, 2011, The Straddler met with Raquel Fernández at her office at NYU, where she is Professor of Economics. Fernández has been a leader in the study of culture's impact on economic outcomes. Our conversation explored her work as well as her perspective on the strengths and limits of economics as a discipline.

Fernández, October 17, 2011
The interaction between culture and economic outcomes did not exist as a legitimate area of work ten years ago. Ascribing differences in economic outcomes to differences in preferences, or even differences in beliefs, used to be seen as very bad economics—not because people thought that culture might not matter, but because they didn’t have a way to think rigorously about how culture matters. Theoretically it wasn't very difficult but empirically we had no way to isolate the effect of culture from that of economic variables or institutions. I decided to look at culture through something I dubbed the epidemiological approach. Take the example of women’s work. I studied women who were born in the United States but whose parents came from elsewhere. Because their parents came from other countries, and to the extent that parents transmit cultures to their kids, you would expect to see systematic differences in how much these women were working, even though they were faced with the same environment. Of course, the environment is never exactly the same, but you try to make sure it is as similar as possible by studying the work behavior of women who live in the same metropolitan area, whose husbands earn basically the same, whose education is the same, whose husbands' education is the same.  The question then becomes whether we see systematic differences in how much these women work if, given these very similar environments, they are from Swedish as opposed to Italian ancestry. For the variables of fertility and work outcomes, I was able to make the case that culture does matter—parental ancestry mattered to how much they worked or how many kids they had.

Now this field has really taken off.  For example, at the National Bureau of Economic Research, which is an agglomeration of academic economists, they’ve started a culture and institutions workshop. It’s still true that if you work on culture, people don’t know where to place you. People ask, “is it macro? Is it micro? Where are you going to present that? Who’s going to invite you to give your seminar?” But economics is not closed-minded in terms of what sort of questions you can ask, as long as you have a rigorous method. I think economics has been incredibly ambitious in what it seeks to study and understand. In the area of culture and economics we consider a broad range of questions, including things like the colonial legacies, genetic differences, differences in trust—things that historians, political scientists, and anthropologists have traditionally discussed.

The methodology of economics is so strong that we have had a large impact on many fields, from political science to sociology and even neuroscience. It’s been a very successful paradigm in that what economics does very well is think rigorously. But sometimes that’s not been very fruitful in the sense that there are certain questions that you can’t ask because you don’t know how to model them. Another problem is that methodology frequently trumps the question. Once you have a way to model things, much of the research becomes very self-referential; that is, it becomes more about how the model  behaves and less about the question. I think the question really matters, but a lot of economists believe the methodology matters more than the question. And this leads to very elaborate models of very many things without much of an outside reality check.

There is a beauty to the models in and of themselves. You assume, for example, that people are rational. I don’t think any really good economist thinks that people are perfectly rational, but, on the other hand, if you want to model people as not rational, all of a sudden it’s not clear what choice you should make. There are a million and one ways to be non-rational; there’s only one way to be rational within the confines of a model. Rationality means one thing: you’re maximizing your welfare subject to constraints. Now, if you say people don’t always maximize, and they’re beset by this and that, then all of a sudden you can have a million models. And that’s a little bit unsatisfactory too.

So all of the models are going to be flawed, and hopefully policy is going to be the best that you can do given current knowledge. The problem is that as “scientists” we often don’t have much to say. I don’t think we are scientists. I think we’re more like doctors in the sense that we do research, but in the end there’s a patient, and you have to say, given one’s knowledge, what’s the best way to treat the patient? You can’t just say, well, we just don’t know, at least not in the policy-making arena. We do have to treat the patient though it is important to state how much of our advice is based on evidence and how much is just our own personal inclination.

But the people who go and give advice usually end up with a very bad rap in economics. I am amazed at how much hatred—and I will say hatred—Paul Krugman evokes from some fellow economists. But one of the reasons for this is that he says things for which there is not “scientific” support and which go against what these people believe is "good" economics. Now, people on the other side also say things for which they do not have "scientific" support incidentally, and they don’t get the same amount of hatred. But if you’re speaking out all the time, you’re not doing “science.” So there is that tension.  It means that arguments often come down to one's beliefs—one's politics or ideology—and that isn't sufficiently acknowledged when we are making policy recommendations.  I'm okay with it not being science—it doesn't mean we can't make better or worse arguments based on the evidence or our knowledge of history or other cases. In some sense it is our responsibility to try to persuade others based on what we currently know.

Take the argument we’ve been having recently. Should we be trying to increase aggregate demand or should we be reducing the deficit? How could we have such basic disagreement on this? You would think economists would have solved this issue. Should we let the debt keep on increasing and worry about it later, or should we tackle it now and make it the main priority? Well, a model is not going to give you the answer because it depends on whether you write the model in such a way that getting aggregate demand up is a good idea, or whether you write it in such a way that people are really worried about future deficits that are coming around the road and they won’t invest because they know that taxes are going to be high in the future.

These things are rigged into the model from the beginning when it’s such an unsettled question, and we don’t really have an exact science-based way to answer it, which is why we argue about history. You know, what should one have done in the Great Depression? Or we try to point to other countries’ experiences. And that’s a good way to learn, but it’s not something that economists are great at. A lot of economists don’t look at other countries’ experiences and a lot of economists are very ignorant of history.

Economists don’t have to be free-marketers. But that ends up being the canonical model, and then everything else ends up being a departure from the canonical model, which you’ve then got to explain why you’re departing from. It’s not because the canonical model is right, it’s because you ask most economists and they’ll say, “At least we understand how that economy works very, very well. So you want to tell me that we’re going to move away from this one and move to something else, that’s fine, but you have to explain why you’re putting in all of these imperfections.” So it’s not that you can’t write those things down, it’s just that there is less of a standard way of doing it.

Economists essentially have a sophisticated lack of understanding of economics, especially macroeconomics. I know it sounds ridiculous. But the reason why I tell people they should study economics is not so they’ll know something at the end—because I don’t think we know much—but because we’re good at thinking. Economics teaches you to think things through. What you see a lot of times in economics is disdain for other's lack of thinking. You have to think about the ramifications of policies in the short run, the medium run, and the long run. Economists think they’re good at doing that, but they’re good at doing that in the sense that they can write down a model that will help them think about it—not in terms of empirically knowing what the answers are. And we have gotten so enamored of thinking things through that the fact that we don’t know anything needs to bother us more. So, yes, it’s true that the average guy on the street doesn’t understand economics, and it’s also true that we don’t understand economics. We just have a more sophisticated lack of understanding than the guy on the street.