Charles R. Plott interviewed by Michael Parkin
What sparked your interest in economics and lead to your decision to become an economist?
The beauty of economics as a coherent and immediately relevant science attracted me. Economics has an amazing capacity to summarize staggeringly complex phenomena by the application of only a handful of principles. Furthermore, it works. Economic principles lead to an understanding of the complex world around us better than any other branch of science or philosophy.
How does the demand and supply model of Alfred Marshall stand up today in the light of the progress that economists have made?
The accuracy of the demand and supply model is an amazing fact of life. Why it works remains a mystery. We continue in our attempts to improve the principle, or replace it with a different set of principles but so far that has not happened. Through the application of experimental methods we can now understand features of its operation and how its operation can be influenced by institutions. But, Marshall's basic principle still remains as the best understanding of how markets work.
What can we learn about how competitive markets work in classroom experiments?
Learning economics through experiments is really the same as using experiments to learn about any other science. Experiments are used because naturally occurring phenomena, as they are found in nature, are too complex to understand. When left on her own, Nature does not create circumstances that allow us to clearly view the principles at work.
Science is also about communication and the building of knowledge. All science is about creating simple situations that can serve as the lens through which one person can experience for himself or herself what other persons report to have experienced.
In classroom experiments the students see for themselves the operations of the principles of economics reported in the book. For example, price determination when there are a few people on each side of a market is accurately described by the mathematical structure of the competitive model as found in the book. However, just because the principles are reported authoritatively in the book does not mean that the student should simply accept them. The principles are not sermons to be memorized, they are tools to be used, once they are understood. True understanding only follows evidence on how they work. The experiments demonstrate and clarify the principles that are in operation.
Can we learn even more by doing Web-based experiments? What in particular are the gains from running global experiments like those that you’ve designed?
The major advantages of web based experiments are size and complexity. Economies are large and interdependent. The creation of economies that are at once sufficiently simple to understand but also reflect the interdependence that is the substance of some central economic theories requires a large number of people. The web allows the creation of such economies. In addition, the web demonstrates that culture, location, personality, ethnic background, etc. have little to do with the basic principles of economics. This profound generality of the principles of economics is hard for people to accept and the web experiments allow them to see the evidence for themselves.
What do the experiments that you and others have conducted tell us about the harmony or conflict between self-interested choices and the social interest?
Adam Smith says it remarkably well. He tells us that social interest is served by self-interest but he leaves out a step that we know is needed. The relationship between self-interest and social interest depends on the social institutions. For example the lack of appropriate property rights can transform a well functioning and wealth creating system into a commons dilemma. Failure to protect property can result in poverty because the self-interest of those who would steal is focused on wealth destroying activities as opposed to wealth creating activities.
We seem to have little control over human nature but we do have control over the institutional environment within which humans interact. Economics tells us to look to the structure of that institutional environment if we are concerned about social issues. Experimental evidence supports that emphasis.
Some people are skeptical about experiments.
In all branches of science there are people who are skeptical of experimental methods. For the most part they are people who either do not understand the indirect and round about ways of science or are impatient. We have all heard comments to the effect that "It is great in the lab but has nothing to do with the real world." Such comments are heard in all sciences, not only in economics, and they seem directed as criticisms of basic science in general and not simply the use of experiments in that process.
Science is indirect and experiments are part of that process. Experiments are simple situations that inform us about principles. The principles inform us about theory. The resulting theory helps us understand phenomena that are vastly more complex than can be observed in experiments. The many successes of experiments in economics demonstrate the value of the methodology. Other sciences demonstrate similar successes. Thus, I find it a little difficult to know exactly what such skeptics have in mind.
What are some of the easily disposed of criticisms?
Most criticisms are not of experiments or experimental methods in general. They are criticisms of particular experiments conducted. The criticisms suggest that the experiment did not answer a question that the critic wanted answered. For example, critics can be heard declaring that experimental economics is "irrelevant" because the subjects were students, were not businessmen, did not have sufficient incentives, were not representative, etc. etc. In markets critics might say that there were too many subjects, or too few subjects or incorrect relative size of subjects or that the markets should have been organized differently, etc. etc. It is important to recognize that these are not criticisms of the use of experiments. They are actually a call for additional experiments of the sort that would address the issue posed by the critic. Of course, the particular questions about the effect of variables related to subject selection have been addressed experimentally many times and for the most part they are variables that have no effect at all on how the theories perform. Similarly, many different variations of markets and market organization have also been studied.
Basically, such criticisms are only complaints that the experimenter did not do the research that the critic would like done. Such critics want someone to do their research for them.
From time to time we notice that critics simply do not know what has been learned from experiments, or more importantly, they do not know how experiments are conducted. They imagine what experimentalists do and then direct their criticisms to what they have imagined. Of course, in those cases, their idea of what experimental economists do is nowhere near what is actually done.
Are there any compelling criticisms of the experimental approach? How do you respond to them?
There are many important questions that cannot be answered by the use of experimental methods. That is the case in economics as it is the case in any other science. If one wants to know specific facts about the U.S. economy or any other economy then one must study the economy as it is found in nature. It is silly to think about creating the whole economy in a laboratory for replication and study. How does one respond when someone poses a question that experiments cannot answer? Just simply say that they are correct and add examples to the list.
Experimentation is a method that is sometimes useful and sometimes not. The fact that experiments cannot answer all questions does not mean that there are no questions at all that experiments can answer. One can just as easily turn the discussion around by posing questions that can only be answered by application of experimental methods. Almost all subtle issues of theory fall in the latter class.
Have experiments helped economists to design better auction markets or better allocations of resources? How do we know that we’ve achieved a better outcome?
Your question is about the jump from basic science to applications. It is like the jump from physics to engineering. There have been many successful applications for business and government.
When a process is designed and tested in the lab we know something about the principles at work. We know something about the reliability of those principles and we have measurements that inform us about how well the process is working. When one then moves from the laboratory and implements a design in nature, the controls and measuring devices of the laboratory are not available. Consequently, one never knows for sure that the process working according to theory. However, we do know that the problem that the design was intended to fix no longer appears so in that sense we know that the design is working - for some reason or another. Of course, we do not really know that it is working for the right reasons – the right reasons being the theory that lead to the design in the first place.
What is your advice to a student who is just setting out to become an economist? Is economics a good subject in which to major?
Economics is a good background for all of the social sciences, business, management and law. It is also very useful in engineering. It is a central body of science with broad principles that have applications throughout most other fields. So, regardless of what the student plans as a profession, economics is a good place to start. Those who want to become professional economists should understand that it is a technical subject as is any other science or engineering.
What other subjects work well with economics?
I think that both mathematics and statistics are important if one is going into the scientific end of economics.