David Altig, executive vice president and director of research at the Federal Reserve Bank of Atlanta, served the past year as president of the National Association for Business Economics.
Editor's note: This article was originally presented as a presidential address given to the National Association for Business Economics [NABE] by David Altig, executive vice president and director of research at the Federal Reserve Bank of Atlanta, and is forthcoming in Business Economics, NABE's quarterly refereed online journal. We have lightly edited it for consistency with Economy Matters.
I close my year as NABE president with a couple of emotions. The first is gratitude. Gratitude to the membership for allowing me the honor of serving in this role. Gratitude to my colleagues on the board of directors for their support. Gratitude to the board of the NABE Foundation for their vision and for providing the material means to put that vision into action. Gratitude to all the past presidents who have so generously offered their time and guidance. Gratitude to all the members who have given their sweat equity by serving on our many committees. And, most of all, gratitude to Tom [Beers, NABE executive director] and the entire NABE staff whose tireless devotion to this organization made this job easy, fun, and one of the most rewarding things I've done in my career.
My second emotion is pride. Not pride of accomplishment, but pride of association. In her 2020 presidential address, Constance Hunter called out the multiple ways that NABE, via support from the NABE Foundation, has supported young and aspiring economists with scholarships to attend NABE conferences and pursue coursework in preparation for the Certified Business Economist exam.
Notable in Constance's comments was the then-newly established Diversity Scholars Program, an initiative designed to expand opportunities in the profession for economics students and early-career economists from diverse backgrounds. I am fortunate to count three past and current scholars among my colleagues at the Atlanta Fed, and I am extremely pleased that some 42 scholarship recipients, student members, and young professional are attending this conference.
It is to all of you students and younger economists—in-person attendees, virtual attendees, and any who might stumble upon this address in some format down the road—that I wish to address my remarks this afternoon. In so doing, I am going to deviate some from the style of past presidential addresses. My remarks are going to be highly personal, so I apologize in advance.
Many years ago, I read an interview with Bob Dylan that I think appeared in Rolling Stone magazine. I've not been able to locate that interview, the miracle that is Google notwithstanding. I am going to roughly paraphrase the comment because I can't actually verify that what I remember is really what Dylan said. But if he didn't say it, he should have.
Here is what I recall. The interviewer asked Dylan what he wanted people to get out of his music. His response was something like, "I want them to get what I got." That's what I want to share today—what I got from studying economics. I am not going to refer to career opportunities, but the psychic return I have reaped from the discipline at the center of my entire professional life. I want to explain why I am proud to be an economist.
In an internal profile written when I first joined the Atlanta Fed, I described why I drifted, contrary to my original plans, into the study of economics. "Early on," I said, "I discovered a way of thinking that just really appealed to me. The way economists approached the world seemed right; there was a nice orderliness to it."*
Ultimately it was more than orderliness that appealed to me. It struck me that the economic way of thinking offered a fundamentally generous, inclusive, and optimistic view of the world, of the way it operates, and of the people who inhabit it. I suspect this is not the description that comes to most people's minds when they hear the term "economics." I want to make the argument today, by way of my own journey, that the description is apt. So, forthwith, three basic ideas in economics that convince me the world would be a better place if everyone thought like an economist.
Number one: De gustibus non est disputandam
Literally, "in matters of taste there can be no disputes." Colloquially, the phrase is translated as "there is no accounting for tastes" and, of course, it is the title of a well-known and seminal article by George Stigler and Gary Becker. The premise of Stigler and Becker's article was that economic arguments should, in their words, commence from the assumption that "tastes neither change capriciously nor differ importantly between people… [O]ne does not argue over tastes… the economist continues to search for differences in prices or incomes to explain any differences or changes in behavior."
The Stigler-Becker agenda was to solidify an approach to the study of human behavior that relied on verifiable external facts and not unobservable psychological traits and preferences. As such, the paper is forthrightly positivist and a pillar of what used to be, and I guess still is, called the Chicago School. I would eventually find more in the Stigler-Becker program than a methodological calling. What I discovered was the utter obliteration of any notion of the "other."
The defining experience for me came when, as a young professor at Indiana University, I joined an interdisciplinary study group of faculty members and graduate students interested in ideas related to altruism and nonmarket exchange. One of the members of the group was a professor of anthropology who organized a series of discussion sessions around the book Good to Eat, written by a famous economic anthropologist, Marvin Harris. Good to Eat is essentially a study of food customs and taboos.
What is still fascinating to me about this book is its insistence on explaining seemingly unusual, weird, or even horrific customs and taboos based on the specific environmental circumstances of the people who practiced them. It steadfastly did not attempt to explain these customs as a result of their practitioners' unusual, weird, or horrific preferences. For example, cannibalism is not presented as the gone-amok craziness of backward clans with some sort of moral screws loose, but as a response to uniquely extreme circumstances (in this case acute protein shortages). I remember thinking that a good subtitle for Harris' book would be If Not for the Grace of God—or the Luck of the Draw—Go You.
Becker and Stigler and Harris, at least in the works I am citing, tell us to view the choices of others as a result of the constraints they face. I am not to see those choices as the result of some foreign preference structure, which of course I can easily enough judge as inferior to my own. If I encounter behaviors that strike me as backward, unproductive, or just distasteful, I am not to see in those behaviors a moral or cognitive deficiency. I am to see a person, fundamentally like me, responding to circumstances that might be very different from my own. If there is a more generous vantage point from which to view my fellow human beings, I have not yet found it.
Number 2: Comparative advantage
Probably almost everyone in this audience knows of Paul Samuelson's designation of comparative advantage as one of the results in the social sciences—perhaps the one result—that is both true and nontrivial. Samuelson's comment was made in a presidential address to the International Economics Association, and hence his discussion was about comparative advantage and international trade. But the notion of comparative advantage is obviously about exchange more broadly, whether among countries or individuals. The salient application for my purpose today is comparative advantage across individuals.
Here it is. Comparative advantage tells us that every individual—every individual—has a unique contribution to make that adds more to the whole than is possible without them. The idea of comparative advantage excludes no one. We are all diminished by any impediment to any individual achieving their full economic potential—which is to say finding the comparative advantage which is theirs and theirs alone. To embrace this concept of comparative advantage is to never need a class, or a lecture, or a consultant to appreciate the value of an inclusive economy.
One sidebar. Some of you may have just gagged a little by my invocation of inclusiveness, given that the economics profession is not quite known for being radically diverse and inclusive. To that I have one thing to say: don't judge scripture by the behavior of the clergy. We are trying to do better, and my point is that our own discipline convicts us if we do not open our doors to everyone who might find their comparative advantage in our house.
The third and final proposition on my list: Economic efficiency
I'm pretty sure I was exposed to the general equilibrium efficiency conditions as an undergraduate, but I honestly can't remember thinking much about them one way or the other. I must have had some inkling that they were related to that Adam Smith invisible hand thing, but I first truly took notice in the latter part of my graduate years when the efficiency conditions arrived in the form of the welfare theorems. But here too, I confess that my conception of the theorems was decidedly narrow.
Like most budding macroeconomists in the first half of the 1980s, I was climbing the intellectual mountain built by Lucas, Sargent, Wallace, Sims, Kydland, and Prescott. The program that they initiated was many things, but it was most certainly a methodological movement. And, particularly following the work of Kydland and Prescott, I received the welfare theorems as a really cool, elegant, and tractable way to solve for equilibria in competitive markets.
Fast forward several years and I had cast my lot with the Cleveland Fed, on my way to becoming a Fed lifer. Though I had left academia, I did not leave behind my enthusiasm for the classroom, and I consequently ended up teaching an evening intermediate microeconomics course at Cleveland State University. For reasons that I don't recall, in one of the lectures I decided to cover the efficiency conditions.
I still remember the physical setting very clearly. This was back in the early '90s, PowerPoint really wasn't much of thing, and very few classrooms were equipped with what we would think of today as AV capabilities. So, chalkboard it was. My classroom was rectangular with more width side to side than depth front to back, and its chalkboard stretched over the entire front of the room. I loved that board, chalk dust that you could never quite wash out of your clothing and all.
I began this particular lecture moving from my board facing left to right, revealing the three efficiency conditions in discrete blocks. First, the concept of exchange efficiency showing how market forces equate subjective relative valuations across any two goods, for any two consumers, to their relative prices. Then, the concept of input efficiency showing how market forces equate the relative marginal productivities across any two inputs, for any two producers, to their relative prices.
The magical third step, output efficiency,magical I suppose because its derivation requires a little more algebra but also because it seems so improbable. It just isn't that intuitive that the price system alone, with purely self-interested consumers and producers left to their own pursuits, would generate an outcome in which the relative marginal valuations across any number of goods across any number of consumers would exactly equal the relative marginal costs borne by society to produce those goods.
I had sprawled all of the math across the board, stared at it for a few moments, turned to the class and said something clichéd like "Ladies and gentlemen, meet Adam Smith's invisible hand." Only, for the first time, it did not feel like a cliché to me. The invisible hand in that moment was not just a cool way to solve a model nor was it only a paeon to the virtues of a free market economy. The invisible hand in that moment felt to me like the hand of God.
I didn't realize it at the time, but I was receiving the invisible hand more in line with its description in The Theory of Moral Sentiments (Smith 1759; part IV, chapter I) than in The Wealth of Nations. When Providence divided the earth among a few lordly masters, it never forgot nor abandoned those who seemed to have been left out in the partition.
Here was an explanation of how the collective actions of flawed individuals, fallen from grace and often separated from their better angels, could nonetheless produce something not just orderly but, at least in a material sense, minimally acceptable in human terms. With a little coaxing from those angels, the stage would be set for a type of human progress that only an omnipotent, omniscient, and beneficent central planner could possibly engineer.
This struck me in that moment—and strikes me still—as a profoundly optimistic way to view the human condition. It does not take much contemplation, of course, to recognize the limitations of the perfectly competitive framework. Even if perfect competition is a good approximation to reality—and there is plenty of room for debate on that—I doubt many of us accept that silence on the distribution of income is a positive feature of the competitive framework, and there is little comfort in the theoretical but wholly impractical result that a perfectly constructed system of lump-sum transfers could deliver both a desirable distribution of income and economic efficiency.
But I suggest we would do well to embrace the idea that the competitive benchmark is our North Star and internalize the warning signs about what our discipline can and cannot deliver when that benchmark is not strictly fit for purpose. In his 2017 presidential address, Stuart Mackintosh noted that "'experts' and economists are out of favor with the public and with certain policymakers." That assessment has had a pretty durable shelf life, and I have been giving a lot of thought as to why.
I have a shadow presidential address that is actually the one I first intended to give today. The working title is "Mea Culpa," and the theme is that some of the disfavor we have suffered as a profession is self-inflicted. In a nutshell, economics is well-suited to identifying tradeoffs and not so well-suited to making value judgments about those tradeoffs. We can provide great value in providing insights into different options when we are thrown into the world of the second best, as we inevitably are. But we risk great disservice when we assume the mantle of final arbiters regarding which paths are right and proper. When we color outside the lines, presenting subjective judgment as objective analysis, we should not be surprised to be told that the picture we have on offer is not so beautiful.
But that is a speech for another day, and I want to end my remarks today where I started, addressing those who are considering devoting their professional lives to the practice of economics and those who are just embarking on that journey. A few years back, I took a virtual diversity course designed to provide greater understanding about generational differences in attitudes and perspectives. What I recall learning was that, in contrast to us baby boomers, one or more of the end-of-the-alphabet generations put much more weight on the greater good proposition offered by the professions they might choose to enter.
I'm probably being a little defensive, but the whole thing had a kind of "teach your children-ish" vibe. "You of tender years can't know the fears that your elders grew by. So please help them with your youth, they seek the truth before they can die." I will leave aside the irony that those words were written by a now-aged baby boomer. I have to say I find it strange that the foundation of my lesson in diversity would be firmly rooted in the notion that it is useful to make broad generalizations about tens of millions of people.
But whatever. I’m no expert, so I’ll bite. If you are looking for the case that economics was born in the cause of a greater good, you cannot do much better than to consider the origin of the phrase “the dismal science.” Contrary to much popular belief, the dismal science label was not coined to malign the discipline for its propensity toward Malthusian dystopia. The truth, worthy of celebration, was nicely summarized by the journalist Derek Thompson in a short Atlantic piece about 10 years back. It is worth quoting:
[Thomas Carlyle, the Scottish writer and philosopher] labeled the science "dismal" when writing about slavery in the West Indies. White plantation owners, he said, ought to force black plantation workers to be their servants. Economics, somewhat inconveniently for Carlyle, didn't offer a hearty defense of slavery. Instead, the rules of supply and demand argued for "letting men alone" rather than thrashing them with whips for not being servile.
… But the right etymology [of the term "dismal science"]…aligns economics with morality, and against racism, rather than with misery, and against happiness. Carlyle couldn't find a justification for slavery in political economic thought, and he considered this to be "dismal." Students of economics should be proud…
Indeed.
I promised at the outset to share what I got from economics. What I got was a reason to be proud of the path I had chosen, or at least to be proud if I managed to follow the path faithfully. I found comfort in a foundation made solid by the presumption that we human beings are, in our most basic motivations, more alike than different. I found grace in the insight that every human being has value and has something unique to contribute. And I found hope in the possibility that the right institutions can deliver a more perfect world, even with imperfect people.
If those of you starting your professional journeys are, by chance, looking for something of the same, look no further. You found it.
* Many thanks to Charles Davidson, one of the wonderful writers we are blessed to have at the Atlanta Fed, for not only writing the profile but also being able to dig it up after a decade and a half!