Wednesday, April 1, 2015

Better to be a Cynic or a Sentimentalist?

There's an old throw-away line about how economists think that goes like this: "An economist is someone who knows the price of everything and the value of nothing." 

The comment is derived from the dialogue in one of Oscar Wilde's plays, called Lady Windermere's Fan, which was first produced on stage in 1892. Here's the relevant snippet of dialog:
Lord Darlington: What cynics you fellows are!
Cecil Graham: What is a cynic?
Lord Darlington: A man who knows the price of everything and the value of nothing.
Cecil Graham: And a sentimentalist, my dear Darlington, is a man who sees an absurd value in everything, and doesn’t know the market price of any single thing.
Lord Darlington's comment about cynicism is fairly well-known, at least among economists. At least in my experience, the comeback from Cecil Graham is not known at all.

So which of Oscar Wilde's choices do we take? Cynic or sentimentalist? Economic analysis does suggest an intermediate path, which was nicely enunciated in the title of a 1987 book by Alan Blinder, Hard Heads, Soft Hearts.  Blinder writes:
There is an appealing philosophy of economic policy that combines hard-hearted respect for economic efficiency with soft-hearted concern for society's underdogs. ... We must start thinking with our minds and feeling with our hearts, rather than the other way around. ... The hard-headed but soft-hearted approach is based on two principles. The first, the hard head, is that more is better than less. The second, the soft heart, is that the poor are needier than the rich. Neither of these strikes me as particularly controversial nor ideological. And so there is hope. ... Of course, simply paying allegiance to the principles of equity and efficiency will not provide answers to all our economic policy questions. Many policies enhance efficiency but damage equity, or vice versa. ... In such cases, the principles of equity and efficiency are not enough. We must supplement them with more controversial ethical judgments about whether gains in efficiency compensate for losses in equity, or vice versa. Here the decisions are inherently political and reasonable people may disagree. But keeping the two principles firmly in mind does help.
Perhaps the old joke could be amended in this way: "An economist is someone who insists on both analyzing prices while also appreciating ultimate values--and struggling with the tradeoffs." Or briefer: "An economist is a cynical sentimentalist, teetering on the sharp edges of both views."