Blackboard Economics and Stupidity

I really enjoyed and highly recommend this EconTalk podcast with Ronald Coase.

Coase explains why he wasn’t surprised it took 40 years for the FCC to adopt his recommendations to assign property rights to the airwaves:

No [I wasn’t surprised], not after you’ve studied how things actually operate. It’s a surprise that it took as little time as 40 years. No, it’s not possible to study how things are dealt with without realizing the importance of the stupidity of human behavior.

Economists often say, incentives matter. Coase is saying, stupidity matters. I agree.

Next Coase explains the problem with modern economics and his solution (emphasis mine):

Blackboard economics is economics which you can put on the blackboard, in which you study an imaginary system. It’s not empirically based at all. It’s not concerned with what really happens. It’s what you imagine could happen and what you imagined didn’t happen. So, I’ve been very critical of modern economics, which is too abstract. That’s called blackboard economics. It’s something you can put on the blackboard but that doesn’t exist.

I recommend more empirical work. Study what actually happens and start from there.

I don’t mean–the study that people do with a lot of statistics and so on, not finding out what really happens and getting conclusions based on the investigations, not on what actually happens but on bunches of statistics. My view is you should get down and study what actually happens. But economists don’t do that, by and large.

Here’s one example of focusing on the imaginary over the actual from my experience. As a young engineer, I was tasked with coming up with a transfer cost for the services that my department provided to the company.

My analysis included the value of renting the space we occupied. I figured if we didn’t occupy it, someone else could, so there was an opportunity cost there.

To estimate this, I called a real estate agent in charge of leasing the office/warehouse space across the street from our location. I asked him how much the lease would be for the amount of space that we occupied. He told me and I included that in my analysis.

When my director reviewed my work, he came across my floor space cost estimate and asked how I arrived at it. I told him it was the actual market rate in that area for office/warehouse space based on a quote from a real estate agent.  In other words, it’s what actual happens, as Coase says.

My director wasn’t happy. He wanted some sort of intrinsic value calculation for our real estate. He told me to contact our finance department so they could help me calculate that. He wanted to use blackboard economics to find the answer, rather than just using what actually happens.

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6 thoughts on “Blackboard Economics and Stupidity

  1. Was he upset because he thought it was too high? That can easily be countered by also adding the costs to realistically do that, such as the cost of condoning off your area for a tenant as well as adding the services required by a tenant (I.e. private restrooms, kitchenette, etc.) and the cost of someone to manage the property…..
    As long as we’re being realistic, I don’t see why a high cost would be such a terrible thing.

    • No. He was upset with my method. He was an engineer, not much of a finance or economics person. I think he thought I was trying to take a short cut and avoiding work and he really didn’t think the market rent value would reflect the cost of our space.

  2. Pingback: Blackboard Economics e.g. | Our Dinner Table

  3. Pingback: Coase | Our Dinner Table

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