Economists Discover the Poor Behave Differently From the Rich

In a speech in Frankfurt in October, Peter Praet, a member of the executive board of the European Central Bank, told a conference of economists something curiously obvious. “Individual households are heterogeneous in many respects,” he said. “It is important to measure and analyze this heterogeneity because it can have important implications for aggregate figures.” People are different, he meant, and we need to understand how to understand the economy.

Praet had to state the obvious because until this year economists, in particular those who make forecasts, put their faith in models that ignored those differences. Those that the ECB and the International Monetary Fund used to predict the future relied on a “representative agent,” a single imaginary person who stands in for everyone.