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The interest rate for cargo traveling between the stars at close to the speed of light. Political economy of teams of pirates. Economics of brushing teeth. Effect of prayer on God’s attitude toward mankind. These are the subjects of research papers published by peer-reviewed economic journals with the full understanding of the unreal nature of the matters discussed. Notably, these papers have been written by outstanding economists such as Paul Krugman, Peter Leeson, Alan Blinder, and James Heckman rather than mere cranks.
The reader naturally tries to understand whether the authors are joking or not. They are and they are not. It is difficult to distinguish between the joke and the non-joke, as economic theory deals with the internal logic of situations rather than the external features of the reality, so it can easily move to any universe where a situation is reproducing.
Economics: a perspective rather than an area
The standard definition of the science of economics is the ‘study of how society manages its scarce resources’. I opt for a more specific version (link in Russian) in which these decisions are taken by people in their different roles rather than by an abstract society, i.e. ‘Economics studies how economic agents (individuals, businesses, governments, etc.) make decisions and communicate on allocating limited resources (physical, natural, cognitive, etc.) in their personal/collective interest’.
Note that this definition does not say that these agents must live in reality. The focus is different: they should have interests, the resources should be insufficient to meet all the needs of all the agents at once, and the agents’ decisions should influence one another. Cases in which all the three conditions are met become the subject of economic study, whether it is a team of pirates, an interstellar cargo vehicle, or a Transylvanian castle.
Hence, we have the first and most unimaginative answer to the question from the headline: there are no ‘unreal subjects’ for economists. There are stories with embedded scarcity and choice and those without them. A boring seminar is an example of the latter, while an invasion of vampires is an example of the former.
Any model is a simplified version of reality
The second answer is less obvious: a study set in a fictional world does not go beyond the scope of economic research, rather, it highlights its characteristics.
To describe how people make decisions, economists have to imagine their interests and lifestyles. A classic example is Keynes: he assumes that first, an individual decides how much to spend and save, and only then how to save. This is not a data-driven conclusion but a psychological assumption postulated by Keynes and successfully used in macroeconomics.
In his essay on how to build an economic model in your spare time, Hal Varian, an economist specialising in information economics and former chief economist at Google, compares the job with that of a sculptor, who spends most of their time on removing things rather than adding. His key advice is to simplify the model until it gets simple enough to make the mechanism it illustrates crystal clear. As an example, Varian presents the story of a seminar he gave about some of his research, where a fellow lecturer noted that he was working on a similar problem but his own model was much more complex. Varian replied that his own model was complex when he started too but he kept working on it till it got simple.
The result of such work is a miniature, a simplified copy of reality. The more abstract the model is, the more notional it is. A representative agent who lives forever, foresees the future beyond the eternity, and consumes the only good seems to be as fantastic as a vampire. However, this is the agent economic research has conveniently relied on so far.
Thus, a vampire illustrates it perfectly well. In the problem of renewable resources, solved by Austrian economists Richard Hartl and Alexander Mehlmann in ‘The Transylvanian Problem of Renewable Resources’, vampires face the problem of resource exhaustion. If they uncontrollably consume people’s blood, turning them into vampires, the resources (people) will decrease rapidly while the consumers (vampires) will increase, which will bring them to starvation. Technically, the task is similar to the standard problem of the utilisation of renewable resources such as fish or forests. The fish can be changed for people and the fishermen for vampires, but the mathematical tool is the same.
However, the reader will take notice of the changes, and this is where the value lies. The replacement makes the reader see those preconditions that have escaped their notice before. The crucial thing is how patient the vampires are. If they value their future nearly as much as their present, the best strategy for them is to control their appetites and let the population of the people recover. Exactly the same outcome in the fisheries economics model is called the optimal resource allocation. If the vampires prove to be impatient, the optimal outcome is the option that will not let the valuable resource recover.
Imaginary worlds as pure laboratories
The third answer is that fictional worlds let economists raise questions that cannot be posed in reality and thereby check the robustness of their tools.
In 1978, future Nobel Prize Laureate Paul Krugman studied the problem of interstellar trade, i.e. what return a transaction should yield for the seller if the time taken in transit appears less to an observer travelling with cargo than to a stationary observer.
If the product cost is $100 and it takes a month to deliver it, then if the interest rate is 10% per annum, its value in a month will be $100.80. This does not pose a problem for world trade since all parties to a transaction use the same time scale. However, as applied to the crew of a spacecraft travelling at close to the speed of light, it may take months to fly from one stellar system to another while decades may pass on the planets from and to which they travel. The seller’s capital will be frozen in the inventory all these months or years. What time should be used to compute the returns?
The idea of looking for a solution in physics and the theory of relativity appears very tempting. The right answer is found in economics, specifically in the theory of opportunity cost. If the seller buys a bond instead of investing in interstellar freight, what return will they yield by the time the cargo reaches the other planet? If the return on the bond proves to be much higher than that on the investment in freight, the interstellar trade will be unprofitable. The first fundamental theorem of the interstellar trade is that the calculation should be based on the timeframes of the planets rather than of the spaceships.
Krugman describes his theory as ‘a serious analysisof a ridiculous subject’ and honestly calls the theorems proved useless but true.
However, from the methodological point of view, his text is impeccable. A theory which is workable only in routine circumstances is a description rather than a theory. Extraordinary settings serve as a stress test. They block intuitive signals and enable researchers to determine which part of the tool is the load-bearing structure. Furthermore, a fictional world is the only truly clean laboratory an economist may have. It has no problems with data, endogeneity (dependence on internal factors), or measurement, as the parameters are set by the researcher, and it clearly shows whether the economic tool applied is workable.
The article written by economist Dennis Snower about the optimal destruction of vampires in response to Hartl’s and Mehlmann’s study (a preprint at the time) serves a similar purpose. Snower playfully comments that Hartl and Mehlmann ‘helping vampires solve their intertemporal consumption problem’ and consider people as ‘passive receptacles of blood’ and calls such an approach erroneous. He proposes his own ‘framework for the synthesis of vampirism and macroeconomics’ where the people play an active role.
In his article, Snower arrives at the theorem of the vampires’ neutrality. Where there are many vampires, the economy is under pressure. The vampires reduce human labour and a diversion of considerable resources is needed to produce wooden stakes to fight the vampires. However, this pressure is short-running. As the number of vampires decreases to a certain level, it becomes unprofitable to spend massive resources on wooden stakes. This is why the optimal number of vampires is not necessarily zero. In the longer run, the economy regains the equilibrium (the proportion of vampires to people and the cost of wooden stakes) that existed before the invasion. This is the neutrality of vampires, according to Snower.
In considering an absurd thing such as vampires, Snower illustrates an absolutely serious macroeconomic mechanism that an external shock (the vampires) changes short-term economic indicators but not long-term ones. Thus, the vampires are a veil in this model, concealing the real processes.
By no accident does the economist uses the term ‘veil’. The theorem is modelled on the classic statement of the long-term neutrality of money. A simple rise in the supply of money will have no long-term impact on real figures such as economic growth, employment, and real wages, but it will increase prices and nominal wages (link in Russian). The conclusion channels the old metaphor ‘money is a veil’, meaning that nominal values (e.g. wages) disguise real ones (e.g. purchasing power, the amount of goods one can buy on these wages).
A true story wrapped in fiction
The fourth answer is to the contrary. Sometimes, the subject does not appear serious enough but the object proves to be more than real.
Pirates serve as a perfect example. The subject refers to an adventure story featuring treasures, the Jolly Roger flag, and parrots. But the object of the study is an issue which is thought to be a key problem in political economy: how order emerges if there is no state.
Peter Leeson, Professor at George Mason University, shows (link in Russian) that nearly all pirate customs may be explained in a clear economic language.
The Pirate Code, which was signed by crew members on shore, banned gambling, night drinking sprees, and fights. In other words, it mitigated the negative consequences of this behaviour on a ship where the survival of the entire crew depended on the efficiency of each member. Captains were elected by voting and might be dismissed at any time. They were on an equal footing with quartermasters, who were responsible for procurement and boarding teams – a system of checks and balances in its purest form. The intimidating flag and a formidable theatrical appearance, such as that of Blackbeard, served as a signal to reduce the cost of highjacking, as it was cheaper for both parties if the victim surrendered without a fight. The authenticity of the signal was ensured by the death penalty for piracy – a price too high for anyone wishing to make innocent use of it.
However, the author draws conclusions that are far from romantic. It was not adventure seekers who usually joined pirates but unemployed seamen, as the labour market was tight at that time, with no reskilling opportunities or state support offered to those who had lost their jobs.
The pirates were not the only ones who made money from piracy. The beneficiaries included those who provided the infrastructure, such as the governors of remote islands, who received a portion of the booty as a harbour fee, the traders who sold a barrel of Madeira wine to pirates for 300 pounds instead of 19, the buyers of stolen property, and the governments that recruited pirates as privateers during wars. Without this infrastructure, the protests of desperate people would have been a series of isolated episodes rather than a systemic challenge. It is no wonder that famous pirate treasures prove to be an exception and a recent myth, since a life under the persistent threat of the gallows did not encourage long-term financial planning.
Literary material is very important for such research. The image of a pirate established in culture may enable one to see which things were considered frightening and which were admirable at the time. Fiction helps us to know a world which has left very few documents, apart from court proceedings.
Incidentally, the logic of signalling has not been forgotten since the 18th century. Hein Schreuder, a Dutch economist, has stated a positive theory of the business suit in which a business suit sends the message that its wearer is ready to accept the rules of the game and channels their status. A switch from a two-piece suit to three-piece attire should draw special focus, as it is an unconscious signal to shareholders that the wearer pursues their own interests. The author proposes a typology of neckties that makes it possible to build a social connectedness diagramme by type of tie knot. This is certainly a joke, but it sends the same message as the Jolly Roger flag that clothes may speak in an expensive and precise language about the intentions of the wearer, and it is cheaper to use this language than to prove intentions by doing.
A joke may turn out to be a forerunner. For instance, an article by former vice chairman of the Federal Reserve Alan Blinder about the economics of brushing teeth was initially written in response to the expansion of the human capital theory that regarded knowledge, skills, and health as equity people invested in for the sake of future gains. In the paper, Blinder attributes the hygiene routines of chefs and waiters to alternative time costs and the dependence of income on freshness of breath. Specifically, chefs’ wages are higher, so they brush their teeth less often because their time is more expensive, while waiters’ wages depend on the freshness of their breath, so their gains from brushing their teeth are higher. Nowadays, health behaviour models based on the same logic are a part of routine research. The bounds of absurdity prove to be flexible, and this is worth remembering when reading any ‘unserious’ paper.
Sometimes, the only unserious thing is the wording of the matter. Economist Robert Oxoby attempted to find out which of the two AC/DC vocalists, Bon Scott or Brian Johnson, had a better impact on public well-being. He uses the absolutely standard method of a classic ultimatum game in which one player proposes how to share a sum of money with the other player, who in turn can either accept the share offered or reject it, leaving both players holding an empty bag. Johnson’s singing made players more generous and cooperative. These funny settings help the researcher arrive at the rather serious conclusion that the concepts of fairness people might be guided by despite the simple benefits can depend on a background that is quite irrelevant.
Jokes as professional hygiene
The fifth answer is that certain funny and parody papers are intended for colleagues rather than the general audience and represent a professional self-critique in the only form that is capable of getting its message across.
Economist Axel Leijonhufvud describes life among the Econ tribe from an anthropological point of view, including castes, totems, the disdain of micro- and macro-Econs for each other’s totems, the priesthood of math-Econs living in the harsh landscapes of mathematical abstraction, the lowest caste of O’Metrs doing the digging work (referring to econometricians dealing with data rather than pure theory), and modls (a deliberate misspelling of ‘models’) as the key product and the item of prestige. The paper touches on a sore spot as it is very precise in describing the reality of economics. A review of the article argues with the specific result, while the joke describes customary practice, which is harder to sweep under the rug.
Indian economist Amartya Sen chooses the form of a parable. In his essay, the Buddha has a conversation with his disciple Subhūti, who has not avoided the great cycle of rebirth, has been reborn as an economist, and at the time is overwhelmed by the two Cambridges debate about capital and whether it is possible to aggregate heterogeneous capital goods to compute the marginal product of capital (i.e. the rise in output per one extra capital good) if the aggregation requires the interest rate determined by the said marginal product of capital which is yet to be calculated. In the beginning, the Buddha asks Subhūti why he is trying to solve the capital measurement problem and what benefits it would bring. After analysing studies by Robert Solow, Paul Samuelson (US Cambridge), Piero Sraffa, Joan Robinson (UK Cambridge), and other ‘brahmins’, it turns out that the advice of relying on labour where labour exceeds capital can be given without the aggregation of the latter. ‘What have I got?’ asks Subhūti. ‘Nothing,’ answers the Buddha. A review could not have delivered such a verdict on a multi-year debate, but the parable could.
Nobel Prize Laureate James Heckman evaluates the effect of prayer on God’s attitude toward mankind. The study is an accurate parody of identification by assumption where the researcher makes the assumption of a connection between an observable and an unobservable and then tests it out. If one takes it on faith that the frequency of prayers depends on God’s attitude, then based on this frequency, it is possible to recover the connection with a variable nobody has ever observed: God’s attitude toward human beings. Those who know that this method is absolutely legitimate have the most fun. For example, we are unable to observe a human being’s capacity directly but can assume the connection between the capacity and test results, and we can use them to evaluate capacity. Heckman won the Nobel Prize for developing a theory and methods enabling us to judge things we are unable to see directly by those we can observe in inevitably incomplete and selective data. However, the evaluation of prayers applies a methodologically rigorous method to a self-selected assumption about a causal relationship.
Canadian economist Gregor Smith discovered that for Japan, the Phillips curve, which demonstrates the inverse relationship between inflation and unemployment, looks like Japan. After this study, it seems helpful to remember more often the joke about the search for regularities in data.
Four unrelated Goodmans coauthored an article about the impact of alphabetical order and larger numbers of coauthors on citation rates. US economist Philip Musgrove proved that any job takes 2.71828 (the number e) times longer than planned, and an attempt to reduce this time increases it by е² (approximately 7.389) times.
All these works have the common feature that their formats are indistinguishable from normal articles. This makes them charming. Concurrently, they pass the following verdict on economics. If a correct tool may be applied without loss of rigour to prayers, vampires, and brushing teeth, the rigour guarantees internal consistency but not meaningfulness. The joke part indicates a red line and reminds us where it is drawn. By printing such articles in its trade journals, any profession does more good for itself than any professional code.
This goes beyond accidental editorial twists. In certain periods, professional economics regarded jokes as an important element of the field. In 1960–1980, the Journal of Political Economy had a regular Miscellany column. It published articles about the economics of brushing teeth and sleep, The Conference Handbook by Nobel Prize Laureate George Stigler that could be used by any participant in an academic conference for discussing any scientific paper, a story of data torturing, the macroeconomics of vampires, etc. Looking back, the journal calls these texts ‘short, fun, but serious as well’. This tradition was later deliberately continued by Economic Inquiry. Its Miscellany had a dedicated editor who accepted funny articles along with normal scientific papers. The journal published ‘Life Among the Econ’ by Axel Leijonhufvud, the AC/DC experiment by Oxoby, Krugman’s interstellar trade, Heckman’s prayers, and the article by the four Goodmans about the benefits of coauthoring with persons bearing the same family name.
So, economics’ ability to make fun of its own tools was nearly institutionalised for a time. This is an important part of professional culture. If a method is so familiar that scientists may seriously use it to study vampires, necktie knots, or God’s attitude toward mankind, it may be helpful to use it in this way from time to time, if only to re-establish the boundary between mathematical accuracy and conceptual meaning.
It is just beautiful, after all
The only answer remaining appears to be the most important, although economists formulate it least often.
Krugman confessed that he wrote his article about interstellar trade to cheer himself up because he was ‘an oppressed assistant professor, caught up in the academic rat race.’ The freedom to do something that will be neither appreciated nor reported is the perfect condition for good ideas to occur. Varian gives us advice to look for them in our newspapers, conversations, and everyday lives rather than journals: his ‘A Model of Sales’ originated from an attempt to buy a TV set at a bargain price. Getting interested in strange things is a necessary condition for doing research rather than a distraction.
However, there is a pragmatic reason. As early as 1971, Herbert Simon, who won the Turing Award and the Nobel Prize, noted that ‘a wealth of information creates a poverty of attention.’ An article about vampires will be read, while a study of the optimal management of renewable resources may not be, though the text is the same.
So, if you come across an article about the optimal behaviour of vampires, it is worth asking yourself which commonly used assumption stands out rather than whether the author is joking. Fictional settings do not distract economics from reality but serve as a mirror reflecting prerequisites and the operation of real mechanisms. Like a good story, a good model is a small world featuring a convincing and recognisable logic. This is nearly all one needs to write it.
