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INTERVIEWS
WITH ECONOMISTS
PROFESSOR
BOB GREGORY
Professor Gregory is currently Professor of Economics and
Head of the Division of Economics and Politics in the Research
School of Social Sciences at the Australian National University,
Canberra. His research interests are primarily in Australian labour
markets, international comparisons of labour markets and economic
policy generally.
Professor Gregory has been closely involved in Australian economic
policy development. In 1988, he was a member of the committee
that recommended the introduction of student income contingent
loans, collected by the Australian Taxation Office. From 1990
to 1993 he was Principal Consultant in a series of aged care reviews
for the Department of Community Services and Health. Professor
Gregory was a Member of the Board of the Reserve Bank of Australia
from 1985 to 1995 and, from 1986 to 1991, he was a member of the
Australian Sciences and Technology Council.
Professor Gregory is an elected Fellow of the Academy of the Social
Sciences (1979). In 1996 he was awarded the Order of Australia
Medal. He is currently President of the Economic Society of Australia
and has held positions at the London School of Economics, Industries
Assistance Commission, Northwestern University, the Federal Reserve
Board, Washington and the Graduate Business School, University
of Chicago.
In 1983–84, he was Professor of Australian Studies at Harvard
University.
It has been argued that the personal choices confronting an
individual cannot be reduced to mere economic calculations. How
do you respond to this objection?
Of course personal choices are not mere economic calculations.
I work more than I should do – given how little I am paid
and, from an economic viewpoint, I have too many children. But
there are three important points to bear in mind: First, some
decisions are more economic than others and the power of economics
to explain decisions will vary according to the circumstances.
Economics provides a better explanation of Australia's ability
to export footwear than an explanation of why we play Australian
rules football rather than grid iron. Second, most economics does
not attempt to explain individual decision. It attempts to explain
why market aggregates move in the way they do – for example,
to explain why motor vehicles sales rise and fall in response
to price and income changes, rather than which individual buys
which particular vehicle. Third, economics attempts to take into
account some elements of personal choice by assuming that the
utility function is different for different individuals; that
is, individual tastes differ.
The economic assumption of an individual’s rationality has
often been criticised as being unrealistic. Yet it is a basic
assumption of economic analysis. Why do economists continue to
make this assumption?
Economists assume individual rationality to build a consistent
model of economic behaviour. The test of the model is predominantly
how well it predicts outcomes for large groups of people rather
than its ability to explain the choice of any particular individual
as a rational choice. Hence, if one half of a group of individuals
makes rational decisions on day one and the other half makes random
decisions and then the next day they reverse roles the group will
look as though it is behaving rationally when the data is aggregated.
For the group as a whole the random elements of decision making
will cancel out. Economics therefore only needs to capture the
consistent rational element of an individualís decision
making, not every aspect.
Some economists have as their primary focus the fundamental
economic theories and concepts while others focus more on applications
and problem solving. What suggestions do you have for the beginning
student as to the appropriate focus?
The best approach for a student is to focus on learning and applying
the theory. But it is a good idea to motivate the learning and
understanding by problem solving and applied work. I have found,
however, that students find it hard to combine theory and applications.
But we should still keep trying and make sure that students enjoy
the subject. I am more interested in applied work and find advanced
theory too abstract for my taste. Yet I read theory and attend
theory seminars because if I lose my theoretical insights I cannot
do good applied work. The best theorists also keep their eye on
applied work so they have a better feel as to what to theorise
about.
The true beauty of the model of consumer behaviour is found in
its many diverse applications. Can you provide us with some examples
of how you have applied this theory?
I love economics and have devoted my life to it. But I have never
found consumer theory to have ‘true beauty’. It just
didn't interest me that much. Many of my colleagues have, however,
and often they don‘t like the parts of economics that I like
best. We all have different tastes. But I learned and understand
consumer theory because it is a lynchpin of the demand curve that
underlies all my work. A good economist should not pick and choose
what undergraduate theory to learn: she should be mistress of
it all.
I have worked for the government on policies for aged care and
child care. For both these studies we needed to estimate the demand.
How much would the demand for nursing home care change if nursing
home care became more expensive? It is rather surprising how responsive
the demand for nursing home care is, even though the aged in nursing
homes seem to have such a great need for the care. But care at
home is a very close substitute and much closer than you would
believe. Similarly, demand for child care is also very price sensitive
because there are so many forms of child care that can be put
together – use of neighbours, partners, grandmothers, older
children and so on. As a general rule I found that most policy
makers have in their minds a price elasticity that is too low
and because they tend to be dominated by short-run considerations
overlook the price elasticities in the longer run. Surprisingly,
nursing home care lent itself very well to economic analysis even
though many thought that because aged care is about need, duty
and care that economics would have little relevance.
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