Among the many excellent points made by Econgirl in her post this week discussing a recent NYT op-ed piece by George Loewenstein and Peter Ubel criticizing the use of behavioral economics to formulate policy is the following spot-on summation of the relationship between behavioral and traditional microeconomics:
First, the divide between behavioral economics and traditional microeconomics is not nearly as wide or as clear as [the Loewenstein and Ubel piece] implies. Put simply, the difference between traditional and behavioral economics is that traditional economics assumes that individuals are always able to maximize their long-term utility and aren’t swayed by silly things like discrepancies between short-term and long-term happiness, the framing, wording or context of their choices, self-control problems, cognitive limitations and the like, and behavioral economics…well, doesn’t.
In other words, behavioral economics is more or less traditional microeconomics without the simplifying assumptions.
This characterization put me in mind of a more general postulate about the relationship between predecessor and successor theories in science that Niels Bohr called the principle of correspondence. Bohr derived his correspondence principle in the first instance from the observation that the predictions of quantum mechanics correspond to those of classical mechanics when quantum values are sufficiently large. But the principle is equally applicable to the relationship between other successive theories, such as between Newtonian gravity and relativity, which yield the same predictions when gravity is sufficiently weak.
Bohr believed it was a necessary feature of the growth of scientific knowledge that the predictions (if not the theoretical interpretation) of previously successful scientific theories should in every instance correspond to a special case of the theories that succeed them. The necessity of this relationship arises from the fact that if the predecessor theory had not made correct predictions for at least some realm of experience, however limited, it would never have been successful. And a successor theory must always account for its predecessor’s success by yielding the same predictions within that realm.
Surely by virtue of having just read Econgirl’s post, I was attuned to the correspondence principle when, working through my backlog of Econtalk podcasts, I finally got around to listening to a discussion from last February between Russ Roberts and Larry White on Hayek and money. And I was struck by how little disagreement their talk attributed to Hayek and Keynes about the dynamics of the expansionary phase of the business cycle. Where they parted company was over the persistence of depressed economic conditions long after a credit or technology bubble has burst. Austrianism fell into obscurity over its lack of a plausible explanation for this phenomenon, while the Keynesian synthesis occupied the field of macroeconomics for the better part of a century and into the present day.
But as much as these two schools of economic thought are cast in opposition to each other, it seems that their predictions more or less correspond given the assumption of normal economic times. And if the current Austrian revival produces a superior theory of recession and recovery, the correspondence principle requires that it account for as much success as today’s mainstream macroeconomics can honestly claim.