Whilst making pies yesterday I happened to recall a sentence I read 7 or so years ago, which suddenly struck me as very silly. So I just looked it up to make sure I hadn’t imagined it.
Here’s the whole paragraph.
A final point worth noting on gang wars is that their strategic
aspects are not lost on the participants. Gangs use violence on
their competition’s turf as an explicit strategy for shifting demand
to their own territory. As one former member of the rival gang put
it during a gang war:
See the thing is they [the gang for which we have data] got all these
places to sell, they got the numbers [of sellers], you know. It’s not like we can
really do what they doing. So we gotta try get some kinda advantage, a
business advantage. If we start shooting around there [the other gang’s
territory], nobody, and I mean it you dig, nobody gonna step on their turf. But
we gotta be careful, ’cause they can shoot around here too and then we all
f——. But, it’s like we ain’t got a lotta moves we can make, so I see shooting in
their ‘hood as one way to help us.
In fact, in some cases, a gang engages in drive-by shootings on a
rival’s turf, firing into the air. The intention is not to hurt anyone,
but rather to scare potential buyers. It is interesting to note that
the gang member understands the game-theoretic consequences
of such actions corresponding to retaliation by the rival, in which
case both parties are worse off than if no violence had occurred. (my emphasis)
Some of you might recognise the paper, given it was popularised in Freakonomics. It’s “An Economic Analysis of a Drug-Selling Gang’s Finances” by Levitt and Venkatesh.
On reflection I might be unfair in calling it silly, but it reflect a strange pathology I think I often see in economics. Economists attempt to understand the consequences of human behaviour, so they build models. Models are necessarily simplified, so we include things like the assumption of rationality, which is then described in terms of optimal behaviour from an individual standpoint. We then use these to try and understand the world.
Except somewhere along the road economists take a detour, and rationality stops being a simplifying assumption, and starts being a way of thinking clever and properly educated people (i.e economists) do. Subsequently when economists observe real life behaviour like the drug gangs, the conclusion isn’t;
Looks like our game theory models are useful for understanding strategic behaviour in drug gangs. Cool.
Rather it is;
Drug dealers understand Game Theory?! Amazing!
Which is a very silly way to go about trying to understand human societies and economies.
I also recall a post on the Freakonomics blog [fn1] in which Levitt remembers fondly a conversation with Milton Friedman early in his career. Levitt had said he was careful to save money on his early salary, and Friedman chided him for being irrational and neglecting to take into account that Levitt’s higher salary in the future would allow him to smooth out his consumption. Here Friedman was clearly drawing on the Permanent Income Hypothesis, his “best scientific work” and one of the cited reasons for his Riksbank prize.
So we have Friedman chiding people for not acting the way his models said they would. A very smart man and a positivist no less!
It is a very strange discipline that is surprised when its models are useful, and cranky at reality when they are not.
[fn1] Which I can’t find. I guess they wanted to make sure all memory of the blog prior to the past few years of hissy fits is damned.