Standard rationalizing models, those that have agents optimizing their own material outcomes, don’t explain all economic facts, especially those dealing with the very, very long run. This has obliged many economist to augment the standard models to include other motivations or objectives of the agents.
For example, to explain the fact that in rich countries richer people tend to have fewer children (which is opposite of the case poor countries), in addition to their desire to optimize their own income you can add the desire of parents to optimize their children’s income. These parental preferences create a trade-off between the quantity and quality of children. Parents choose to have many low-quality children to work on the farm or few high-quality children they send off to college.
Professor Clark has criticized these sorts of adjustments to the standard model, saying they represent arbitrary additions. He complains: “This should make clear that the references specified over goods and children in all these models have no function other than making a bow towards the form of maximizing over preferences in economic models. They do not somehow better explain the world they are just ways of reproducing, mathematically, observed behavior.”
Personally, in the last month I’ve seen models that include preferences for “fairness”, “equality”, “efficiency” and “reciprocity”. There was a macro seminar a couple weeks ago that used “ambiguity aversion” to explain the home portfolio bias and I’ve seen models where “beliefs” and “norms” determine payoffs. In some cases, I felt these additions to the standard model were arbitrary and ill-supported, but my main issue is with model robustness. If we add one sort of psychological or sociological motivation to the model and we get non-standard results, why shouldn’t we add all such motivations? Perhaps adding more psychology to our models would change the results further, perhaps some psychological quirks cancel out other ones.
I guess I’m saying that if economic-man is unrealistic, why isn’t economic-man plus “reciprocity” (or whatever) equally unrealistic?
In any case, The Economist blogger ((who I bet has a really cool first name)) thinks adding such preferences to the standard model is moving the science forward and that Clark is wrong to object.
I think economists should become more comfortable with non-rationalizing models.