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Best Behavior
Twenty-first-century economics is preoccupied with technology, both as a force for change and as a source of insights about economic behavior. But Goolsbee admits he didn’t initially grasp the transformative power of one new technology. “When I was at MIT, they had a beta test of Mosaic, the first popular browser,” he says. “I remember looking at it, and there was a weather map or something. Now, in fairness to me, there weren’t any websites then. But I remember saying, ‘This is stupid–what’s the point?’ Now, of course, it’s obvious. But at the time they all but handed me the World Wide Web and I was like, ‘Aw, who cares?’”

He soon caught on, however. “When the Internet first appeared, this heated debate developed among economists,” he recalls. “One side said the Internet will make it easier for companies to price-­discriminate, and it’ll be fabulously profitable. The other side argued that the Internet will be the great equalizer–it’ll make markets close to perfectly competitive and people much more price-sensitive, and profits will be highly constrained. I’m probably the leading guy associated with that second position. Arguably, I got lucky, but what I wrote basically turned out to be correct.”

Goolsbee’s writings on this subject started bringing him “calls from all over the place, from policy makers and businesspeople–online merchants, particularly.” In the late 1990s, he published some highly influential papers that evaluated the depressive effects of taxation on Internet commerce. Finally, having been an assistant professor of economics at the University of Chicago Graduate School of Business since the age of 25, Goolsbee (who was born in Waco, TX, and grew up in California) gained tenure at 32.

Today’s University of Chicago economists are quite unlike the free-market-fundamentalist followers of Milton Friedman who made the university famous in the last century. When Goolsbee and I return from lunch through the school’s lobby, we pass displays of books and magazines promoting the faculty’s research. Much of it resembles the stuff popularized by Steven Levitt’s 2005 best-seller Freakonomics. Levitt, another University of Chicago economist who received his PhD from MIT, subtitled his book A Rogue Economist Explores the Hidden Side of Everything; in it, he applies contemporary economic analysis to subjects ignored by previous generations of economists–subjects like the poor earnings of inner-city crack dealers. Similarly, the school’s publication Chicago GSB Magazine presents studies examining such questions as why many African-Americans, averaging a fraction of the financial worth of their white counterparts, invest more heavily in bling. In the context of the University of Chicago, Levitt, far from being a rogue economist, reflects a general rejection of some of the tenets of neoclassical economics.

According to neoclassical theory, individuals and groups act according to what economists call the rules of maximizing behavior–that is, individuals always act rationally to increase their own personal advantage, and firms always act to maximize profits. Neoclassical economics has notorious logical difficulties. It presupposes that individuals possess the necessary information to make choices, without explaining how they acquire that information; and it assumes that people know their preferences sufficiently well to be good maximizers, yet it never accounts for how, when a new technology or other novelty appears, they discover those preferences in the first place. To address these shortcomings, economists like Levitt, Thaler, and Goolsbee have increasingly taken two general approaches that are broadly complementary.

First, they have turned to the empirical study of specific behaviors among restricted populations, because in such microeconomic contexts the data tend to be easily obtainable and to yield striking discoveries. Second, economists have imported insights from behavioral psychology and neuroscience.

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Credit: Chris Strong

Tagged: Communications, candidates, presidential race, economic advisor, presidency

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