I have previously posted Part 1 of the 7 habits of highly effective economists in which I covered the first three habits. This post covers the remaining four. The 7 habits were first defined by the late Stephen R. Covey in his brilliant 1989 book The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change.
Habit 4. Think Win/Win
The habit of thinking “win/win” should come naturally to economists, who regularly preach the gains from voluntary exchange between individuals and trade between nations. Earlier this week, former Trump economic adviser Gary Cohn made some newsworthy observations to Stephen Dubner on Freakonomics Radio about how the vast majority of economists support free trade, but alas one of the few who don’t, Peter Navarro, has the ear of President Trump. The interview is well worth listening to:
Regarding policy advice, thinking win/win, or recognising the gains from trade, economists should generally support policies that promote better economic performance, recognising that policies that enhance productivity can provide additional income that can partly be redistributed to compensate any losers from policy change. Literally, a rising tide lifts all boats, but that isn’t always the case when it comes to economic matters. Many policy changes will create losers as well as winners. But we can often find a set of policies that improve economic outcomes and compensates the losers so that most people are better off.
A good example of this is the introduction of the GST in 2000. Remembering that John Hewson lost the 1993 election campaigning for a GST, the Howard government was very careful in designing a tax reform package that would have wide appeal. John Kehoe wrote a good summary of the deliberations around the GST package in the AFR in 2010 in his article GST: the reform that divided a nation:
In the cabinet meetings, Treasury’s [Ken] Henry explained the distributional effects of the GST across all income groups, taking into account things like tax cuts and pension increases. The modelling was used to assure ministers that taxpayers would not be worse off.
Petrol prices were politically sensitive, so the excise rate was cut to offset the GST to ensure pump prices “need not rise”.
This is a good example of how economists should look for and can help design “win/win” policy solutions.
Habit 5. Seek first to understand, then to be understood
This habit is important for economists, because there is a risk we can become narrowly focussed on economic issues in a discussion, and not realise that the reason we have trouble communicating with some readers or listeners is because they are placing a much higher weight on social or environmental criteria.
There is also a risk economists can fall in love with their models, and not realise that one of our elegant abstract models is not always applicable. I don’t fully agree with him, but it’s worth reading former PIMCO CEO Mohamed El-Erian’s latest criticism of the economics profession, Why economics must get broader before it gets better, because it does highlight how economists usually need to think more laterally than their existing models to engage meaningfully in policy debates and influence decision makers. El-Erian is particularly critical of economists for their contributions to the recent US-China trade war debate:
So far, the vast majority of economists have trotted out the conventional argument that tariffs (real or threatened) are always bad for everyone. In doing so, they have ignored work from their own profession showing how the promised benefits of trade, while substantial, can be undermined by market and institutional imperfections. Those who wanted to make a productive contribution to the debate should have taken a more nuanced approach, applying tools from game theory to distinguish between the “what” and the “how” of trade warfare.
While I don’t support Trump’s trade war, I would concede there is a need for economists promoting free trade to try to understand why Trump started the trade war in the first place. Maybe he will secure some concessions from China on intellectual property protection and market access. That said, it seems like a costly and risky way to try to achieve that outcome to me.
Habit 6. Synergise
Habit 6 has become a cliché in business now, so I won’t write too much on it. I’d simply observe that economists have the greatest opportunities to synergise when they work with non-economists and where both understand each other’s perspectives and learn from each other. A good example is economists working with engineers.
Economists and engineers need each other, more than they often think. The late great UK economist Ralph Turvey instructs economists on the importance of working with engineers in a working paper from 2000 What are marginal costs and how to estimate them? He notes that the economist’s concept of marginal cost, the additional cost associated with an incremental change in output, is not as easy to measure as textbooks suggest, and that where operations involve significant capital equipment:
…marginal cost is an engineering estimate of the effect upon the future time stream of outlays of a postulated change in the future time stream of output. There are as many marginal costs as there are conceivable postulated changes. Estimating any of them usually requires engineering and, often, operational research skills. It rarely requires accounting skills.
So economists involved in water regulation and pricing for example need to work with engineers who know what future augmentations (e.g. dam upgrades, desalination plants, etc) could meet future demand requirements.
The role of the economist is to work with the engineers and advise decision makers on the most cost-effective way of satisfying future demands. To give a Queensland example, I recall how my former Marsden Jacob colleague and good friend the late Dr Tony Hand worked extensively with engineers (and with Peter Jacob) to produce the cost-benefit analysis for the Traveston Crossing Dam, which was identified as “the most cost effective and beneficial water storage option for South East Queensland” (see this Bligh government media release) during SEQ’s water crisis in the 2000s. The dam never went ahead, however, as the federal Environment Minister Peter Garrett was concerned about the proposed dam’s impacts on turtles and lungfish.
Habit 7. Sharpen the saw
The previous habits I’ve covered in this post are referred to by Covey as the habits of public victory, as they help us succeed in the public domain. The final habit reinforces the habits for public victory, as well as the habits for private victory. It is the habit of renewal or self-improvement: sharpen the saw.
Economists can sharpen the saw in various ways. We can keep up with current economic and financial issues, by reading local newspapers but also the Financial Times and the Economist, for example. Several blogs are also well worth reading and you can find some links on my QEW blogroll. Increasingly, one of the best ways to keep up with economic news and views is through podcasts, and my favourites are EconTalk, Macro Musings, Freakonomics Radio, and the Bulletin with UBS. I also find it useful to scan recent issues of economic journals, particularly the more policy oriented ones, like the Oxford Review of Economic Policy and Journal of Economic Perspectives, as well as the latest think tank (e.g. CIS, Grattan) publications.
Finally, I think economists should learn other skills, such as public speaking and a data science programming language (e.g. see my post How you can automate ABS data analysis and charting using R). I think Dilbert creator Scott Adams was spot on when he noted to Tim Ferriss who interviewed him for Tools of Titans (pp. 269-270) that:
Capitalism rewards things that are both rare and valuable. You make yourself rare by combining two or more “pretty goods” until no one else has your mix…At least one of the skills in your mixture should involve communication, either written or verbal…It sounds like generic advice, but you’d be hard pressed to find any successful person who didn’t have about three skills in the top 25%.
That’s great advice for economists wishing to become highly effective.