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Posted in Economics on December 2, 2013
I have a new article in Pieria, arguing that the image of mainstream economists as rapid free-marketeers is not entirely without foundation:
There is quite a disconnect between mainstream economics as seen in the public eye and as seen by economists themselves. A lot of media criticism of economics – and the Guardianseems to be going mad on this recently - paints mainstream economic theory as supporting a ‘free market’ or ‘neoliberal’ worldview, possibly in cahoots with the elites, and largely unconcerned with human welfare. Economists tend to switch off in the face of such criticisms, arguing that the majority of them, along with their theories, do not support such policies…
…Yet I think there is a good argument to be made, not that mainstream economics necessarily implies particular policies, but that it is easily utilised to push a certain worldview, based on which questions it asks and how the answers are modeled and presented. This worldview is what the public and journalists all too frequently encounter as ‘economics’, which is why they often conflate neoclassical with neoliberal ideas.
An interesting question – which I do not explore in the article, but have written about before, as has Peter Dorman – is the disparity between ‘econ101′ rhetoric and what economics actually implies. ‘Economics’ in the public image is generally used to justify counterintuitive or unpalatable ideas like the minimum wage and austerity, even though arguing unambiguously for them – particularly the latter – is a position that is actually quite ignorant of ‘economics’ as a field.
Do I blame economists for this? Partly: I think economists should be more worried about their public image, whereas you often get the impression they are more concerned with being enlightened technocrats than anything else. However, politicisation isn’t unique to economics (consider climate change denial or evolution/religion), so it’s a bit unfair to single out economists in that sense. Having said that, 99% of scientists in the former fields are united against the pseudo-scientific caricatures of them in the media, whereas economists are far less able to convey a clear message to the public. In short, perhaps economists should figure things out amongst themselves before they rattle off lists of policy proposals based on their models.
Anyway, enjoy the piece!
Posted in Economics on November 7, 2013
This is just a quick post to let people know that I am not ending the blog. However, readers might have noticed posting has slowed down a bit recently (4 and 3 posts in September and October respectively, versus 6 and 7 in July and August), and this is essentially just because I feel like I have less to say. The reason I started this blog was to get some sort of critical debate over the state of economics and learn (or unlearn, groan) about economics as a field – in other words, the kind of thing that you simply do not find on an economics degree. The blogosphere has definitely delivered in this area, but since I’ve now gotten what I set out to get, I feel I should focus more on other things.
I still have the same basic opinion as when I started the blog: neoclassical/mainstream economics (which exists, no matter what economists say!) is questionable in terms of relevance, coherence and methodology, and is not the only or best way to do ‘economics’, which itself cannot be thought of as an isolated, separate sphere. My opinions on some things have changed: I think some areas of neoclassical theory – as well as econometrics – are worthwhile, and that heterodox economists get some things wrong (the chief one being repeating the same criticisms over and over). My opinion is now less “neoclassical economics is nonsense!1!!” and more “the research program has reached its limitations and needs to be replaced and/or confined to specific spheres”.
However, I am also more optimistic about the discipline changing than I used to be. Real life discussions about the state of economics simply don’t have the same air of hostility as those on the internet – in my experience it’s not difficult to find mainstream economists who will tell you macroeconomics, undergraduate economics and ‘free market’ economics, as well as other areas, are generally garbage. The difficulty lies in trying to get them to think in any other way than the ‘individual agent faced with choices’, but such alternative theories are being developed, and as awareness of them increases, economists will hopefully be able to see things in other ways.
In any case, announcing that I’m “ending the blog” seems like a larger scale version of where somebody in an internet argument says “right, I’m done here” and then after a short break continues replying. Several people have told me attempting to give up blogging is simply futile, and I cannot guarantee that events or economists will not force me to mouth off (like my last post). There are therefore a few possibilities as to how the blog might change after this point:
- I write similar style posts but further apart.
- I write longer, more comprehensive posts but at a much lower rate.
- I start to write shorter posts that deal with a specific thought or idea, or bounce off another bloggers’ post.
So, yeah, stick around! Posting will probably be more sporadic but it will still be there. I’ll also carry on tweeting, though again perhaps less than before. In the mean time, if anyone reading doesn’t yet read these blogs, then you should start.
PS As you might have guessed, this post is actually quite a non-event; I’m just announcing it so I feel less pressure to post regularly.
Posted in Economics on October 23, 2013
I’d like to thank Chris Auld for giving me a format for outlining the major reasons why economists can be completely out of touch with their public image, as well as how they should do “science”, and why their discipline is so ripe for criticism (most of which they are unaware of). So, here are 18 common failings I encounter time and time again in my discussions with mainstream economists:
3. They think that behavioural, new institutional and even ‘Keynesian’ economics show the discipline is pluralistic, not neoclassical.
9. They simply cannot think of any other approach to ‘economics’ than theirs.
11. They think that microfoundations are a necessary and sufficient modelling technique for dealing with the Lucas Critique.
12. They think economics is separable from politics, and that the political role and application of economic ideas in the real world is irrelevant for academic discussion (examples: Friedman and Pinochet, central bank independence).
13. They think their discipline is going through a calm, fruitful period (based on their self-absorbed bubble).
Every above link that is not written by an economist is recommended. Furthermore, here are some related recommendations: seven principles for arguing with economists; my FAQ for mainstream economists; I Could Be Arguing In My Spare Time (footnotes!); What’s Wrong With Economics? Also try both mine and Matthjus Krul’s posts on how not to criticise neoclassical economics. As I say to Auld in the comments, I actually agree with some of his points about the mistakes critics make. But I think these critics are still criticising economics for good reasons, and that economists need to improve on the above if they want anyone other than each other to continue taking them seriously.
PS If you think I haven’t backed up any of my claims about what economists say, try cross referencing, as some of the links fall into more than one trap. Also follow through to who I’m criticising in the links to my previous posts. And no, I don’t think all economists believe everything here. However, I do think many economists believe some combination of these things.
Addendum: I have received predictable complaints that my examples are straw men, or at least uncommon. Obviously I provided links for each specific claim – if you’d like to charge that said link is not relevant, please explain why, and if you want more, I’m happy to provide them. However, my general claim is simply that a given article trying to expound or defend mainstream economics will commit a handful of these errors, perhaps excluding the more specific ones such as history or carbon taxes. Here are some examples to show how pervasive this mindset is:
Auld’s original article commits 2, 3, 4, 5 & 12.
This recent, popular defense of economics as a science in the NYT commits 2, 4, 8 & 13 (NB: I forgot “makes annoying and inappropriate comparisons to other sciences”, although both sides do this).
Greg Mankiw’s response to the econ101 walkout commits 8, 9, 12 & 13.
This recent ‘critique‘ of Debunking Economics commits 9, 11, 15 (though, to its credit, it avoids 2).
Paul Krugman committed 1, 7, 9 & 15 in his debate with Steve Keen
Dani Rodrik, who is probably the most reasonable mainstream economist in the world, committed 3, 4, 13 & 15 in his discussion of economics.
and so on…
Posted in Economics on October 13, 2013
Something has been bothering me about the way evidence is (sometimes) used in economics and econometrics: theories are assumed throughout interpretation of the data. The result is that it’s hard to end up questioning the model being used.
Let me give some examples. The delightful fellas at econjobrumours once disputed my argument that supply curves are flat or slope downward by noting that, yes, Virginia, in conditions where firms have market power (high demand, drought pricing) prices tend to go up. Apparently this “simple, empirical point” suffices to refute the idea that supply curves do anything but slope upward. But this is not true. After all, “supply curves slope downward/upward/wiggle around all over the place” is not an empirical statement. It is an interpretation of empirical evidence that also hinges on the relevance of the theoretical concept of the supply curve itself. In fact, the evidence, taken as whole, actually suggests that the demand-supply framework is at best incomplete.
This is because we have two major pieces of evidence on this matter: higher demand/more market power increases price, and firms face constant or increasing returns to scale. These are contradictory when interpreted within the demand-supply framework, as they imply that the supply curve slopes in different directions. However, if we used a different model – say, added a third term for ‘market power’, or a Kaleckian cost plus model, where the mark up was a function of the “degree of monopoly”, that would no longer be the case. The rising supply curve rests on the idea that increasing prices reflect increasing costs, and therefore cannot incorporate these possibilities.
Similarly, many empirical econometric papers use the neoclassical production function, (recent one here) which states that output is derived from the labour and capital, plus a few parameters attached to the variables, as a way to interpret the data. However, this again requires that we assume capital and labour, and the parameters attached to them, are meaningful, and that the data reflect their properties rather than something else. For example, the volume of labour employed moving a certain way only implies something about the ‘elasticity of substitution’ (the rate at which firms substitute between labour and capital) if you assume that there is an elasticity of substitution. However, the real-world ‘lumpiness‘ of production may mean this is not the case, at least not in the smooth, differentiable way assumed by neoclassical theory.
Assuming such concepts when looking at data means that economics can become a game of ‘label the residual‘, despite the various problems associated with the variables, concepts and parameters used. Indeed, Anwar Shaikh once pointed out that the seeming consistency between the Cobb-Douglas production function and the data was essentially tautological, and so using the function to interpret any data, even the word “humbug” on a graph, would seem to confirm the propositions of the theory, simply because they follow directly from the way it is set up.
Joan Robinson made this basic point, albeit more strongly, concerning utility functions: we assume people are optimising utility, then fit whatever behaviour we observe into said utility function. In other words, we risk making the entire exercise “impregnably circular” (unless we extract some falsifiable propositions from it, that is). Frances Wooley’s admittedly self-indulgent playing around with utility functions and the concept of paternalism seems to demonstrate this point nicely.
Now, this problem is, to a certain extent, observed in all sciences – we must assume ‘mass’ is a meaningful concept to use Newton’s Laws, and so forth. However, in economics, properties are much harder to pin down, and so it seems to me that we must be more careful when making statements about them. Plus, in the murky world of statistics, we can lose sight of the fact that we are merely making tautological statements or running into problems of causality.
The economist might now ask how we would even begin to interpret the medley of data at our disposal without theory. Well, to make another tired science analogy, the advancement of science has often not resulted from superior ‘predictions’, but on identifying a closer representation of how the world works: the go-to example of this is Ptolemy, which made superior predictions to its rival but was still wrong. My answer is therefore the same as it has always been: economists need to make better use of case studies and experiments. If we find out what’s actually going on underneath the data, we can use this to establish causal connections before interpreting it. This way, we can avoid problems of circularity, tautologies, and of trapping ourselves within a particular model.
Posted in Economics on October 7, 2013
I’m in Pieria again, with a post that tries to outline Marxist theories and defend them from some common but clearly misplaced criticisms:
For many, Marxist theories should be laid to rest. His labour theory of value is often referred to as “discredited”, superseded by the subjective theory of value, while historical materialism and its lofty ideals about changing human nature are held to be equally fallacious. His purported views on colonialism (and their Leninist children), while not entirely wrong, are held to be incomplete as they fail to include non-capitalist instances of these phenomena. Finally, his historical ideas about the ‘inevitable’ overthrow of class war and victory of socialism are seen as naive and deterministic, and, to a degree, ethnocentric.
However, as I will show, such crude caricatures have been around for over a century, and were often repudiated by Marx (and his collaborator, Friedrich Engels) themselves.
I talk about the Labour Theory of Value (not price!), which I’ve defended before, as well as the Marxist view of colonialism and imperialism; finally, I refute the absurd idea that Marx supported a strong form of historical materialism.
As a brief conjecture, I think one of the main problems people have with accepting Marxism – aside from the difficult political implications – is that it is such a comprehensive ‘theory of everything’. While, as I argue, Marxism gives birth to many falsifiable hypotheses, it also acts as a lens through which to view the world. Hence, embracing it fully is a big step for a most people, because they (a) lose the ‘individuality’ of their views and (b) have to master an entirely different method of communication. (To this end, I would advise Marxists to refrain from using terminology quite as much as they do – it alienates (!) people).
Anyway, ‘read the whole thing’, as they say.
Posted in Economics on September 30, 2013
Sincerely: do you believe your discipline has earned a status as a decider of policy? Which successes would you point to in order to highlight this? And how have non-economists fared in the policy arena compared to you?
Justin Wolfers recently tweeted to the effect that although economics is not perfect, it is the best existing way to formulate policy. Yichuan Wang has also defended economists’ record in the real world. Bryan Caplan has notoriously argued that voters do not know enough economics and therefore cannot be trusted with policy. In general, economists are always willing to trot out policy prescriptions – often at the end of mathematical papers that are largely incomprehensible to the public – on the grounds that they are scientifically determined solutions to social and economic problems. But does economists’ record formulating policies justify this? I’m skeptical: as far as I’m aware, economists’ record shows few successes, many failures, and a lot of ambiguity.
Generally, economists favourite policies actually don’t have much evidence behind them. ‘Free trade’ deals have ambiguous effects on growth. The issue of whether the minimum wage produces unemployment is famously controversial, with any of the effects predicted being undeniably small. Estimates of the Keynesian multiplier also vary widely, and are generally easy to predict based on the political biases of who is doing the estimation. There is also a surprising lack of evidence to support the contention that fiscal stimulus alone can ‘kick start’ a flailing economy. Sure: the New Deal created growth, but it didn’t end the Great Depression. Japan has had a lot of monetary and fiscal stimulus but has remained in a ‘lost decade‘. Countries that have used stimulus and done well in the recent crisis generally had strong institutions and financial sectors (Sweden, Germany) or are simply at an earlier stage of development and therefore their growth is far more resilient (China). What’s more, you get as many arguments against stimulus coming from economists as you do for it, so even if it were the case that stimulus were the ‘right’ policy, the discipline hasn’t been a beacon of scientific truth concerning the matter.
What’s more, there are many examples of economists chosen policies clearly failing when applied to the real world. Milton Friedman’s quantity-targeting monetarism failed in 3 different countries in the 1980s. The Black-Scholes formula for pricing financial assets is infamous for its complete inability to do its job properly, and has caused chaos wherever it has been used. The ‘Great Moderation’ was built on inflation targeting and financial deregulation, both of which were pushed by vocal economists, and it culminated in the 2008 financial crisis (no, the two were not unrelated). The IMF’s ‘structural adjustment programs’ – such as those used in the ‘transition’ of the former communist countries, and in sub-Saharan Africa, engineered largely by well known economists like Jeffrey Sachs – were notorious disasters. It’s true that Africa’s economic performance has been better in recent years, but this has less to do with the influence of economists and more to do with commodity booms and a decrease in conflict.
The one major example of macroeconomic success was in the post-World War 2, Bretton-Woods era. The ideas put in place – pioneered by economists John Maynard Keynes and Harry Dexter White – revolved around trade management and stable exchange rates. However, these ideas were quite far from the mainstream and are endorsed by few today; the discipline believes it has moved past them. What’s more, these ‘social democratic’ policies were erected largely because of popular support after the devastation of the depression-war period. In fact, the major aim of Bretton-Woods was to prevent another world war from happening. The whole thing was a more of a social movement based on political dynamics than an example of technocratic economists coming along and working their magic.
However, perhaps there are a few examples of this occurring elsewhere. One of economists’ go-to examples is auctioning off wireless spectrums. However, the evidence on this is actually somewhat mixed. In the UK and US, many of firms who’ve won the auctions have been incapable of utilising the spectrums they have bought and have had to sell them back to the regulatory bodies. Furthermore, since different companies often have to cooperate to prevent disturbances, fierce competition can undermine this process and engineers can be necessary to plan and coordinate things. To be sure, I don’t claim to have a definitive answer to this problem, as it is complex, but it seems that economists don’t have such an answer, either.
Now, there is one clear example of economists toolkit resulting in real world success: recent Nobel Memorial Prize winner Al Roth, whose work on ‘matching’ in kidney markets, schools and more has produced admirable results. It makes sense that this kind of thing would be an example where economics ‘works’: after all, in such situations choices are clear, there are not too many actors and institutional variables, and people have access to all of the information they need. However, this is the only obvious example I can think of.
What about non-economists record with policy? Well, developed countries rose to prominence before economics as a separate discipline really existed. And, as Ha-Joon Chang has pointed out, recently industrialised/industrialising countries such as South Korea, Japan and China have largely relied on bureaucrats and lawyers to form policy (and my sources tell me that the economists in China are inclined towards Sraffian economics). Different countries have benefited from highly disparate approaches to policy: in keeping with their history, culture and existing institutions, but without much consideration of ‘economic logic’. To be sure, there are examples of both good and bad policies coming out of the democratic process, but the bad is certainly not worse than economists’ record, and it least it’s accountable to the people it affects. (Incidentally, public choice theory is not a sound argument against democracy, and even if it were, it would also be an argument against economists).
This is only a brief, cursory overview, but even so we should have expected better examples of economists’ successes, and far fewer, less catastrophic failures. In my opinion, if there is a role for economists in advising policy, it’s on small, micro-issues like Al Roth’s auctions, or on specific empirical matters. However, once we get more complex, economists’ pet policies seem to be at best neutral, and they have no empirical reason to prefer their choices to those of the electorate.
Posted in Economics on September 25, 2013
My newest article at Pieria provides an overview of the post-Keynesian theories of consumers, producers, money/banking and trade:
A common charge directed at heterodox economics is that it is defined as a negative and has little to offer in the way of an alternative to mainstream economics (at least, if we ignore the ‘extremes’ of Austrianism and Marxism). It’s true that heterodox economists, including myself, often spend more time criticising mainstream economics than we do offering alternative theories. Yet there is in fact a large amount of work on alternative theories of pricing, distribution, finance and trade. Below I will sketch out what is known as the ‘Post-Keynesian’ (PK) approach to economic theory….
The summary echoes what I’ve said before about the difference between mainstream and heterodox economics:
First, post-Keynesians tend to emphasise that key variables (wages, the rate of interest) are monetary, not real phenomena. This doesn’t mean the notion of the real is unimportant – far from it – but it does mean that it is often a poor starting point for analysis. Second, there is generally no special status accorded to particular variables. Consumers and producers are not ‘optimising’; trade between countries can be imbalanced for long periods of time; the economy can remain in a state of depressed demand and no adjustment of prices will save it. Third, there is a lot of emphasis on institutional considerations. Since prices, demand and trade depend somewhat on social norms and agreements, and since agents tend to fix their decisions for long periods of time to maintain a degree of certainty, different economic trends can persist based on historical path dependence, and there is no ‘one size fits all’ model.
I have to say that I’m not sure why post-Keynesians don’t spend more time on this stuff. I find the theories pretty comprehensive and quite obviously more grounded in reality than the neoclassical approach.
Posted in Economics on September 14, 2013
Yesterday, Paul Krugman had a post in which he pontificated on the Stock Flow Consistent (SFC) models of the economy used by Wynne Godley (and generally by post-Keynesians). These models focus on simple flows of funds between sectors, use endogenous money mechanics and are consistent with accounting identities, making them highly suitable for modelling financial crises. Krugman, however, is not impressed. He seems to see these simple mechanics – with relationships between sectors determined by coefficients – as not quite ‘rigorous’ in the same way as the type of optimising, equilibrium model he favours. He believes that “Hydraulic” approaches like Godley’s have been supplanted by superior models, and so it would be a step backward to take another look at them.
It is worth noting that Krugman’s dismissal of these “hydraulic” models is strange given his zealous promotion of IS/LM, which is surely a hydraulic model if there ever was one: variables are simply determined by coefficients and left largely unexplained in terms of typical ‘optimising’ behaviour. More importantly, though, I think Krugman has quite an ignorant conception of how economic theory has developed. He tries to paint picture of economics as continually discovering new and interesting insights, but the reality is far more complex. In fact, many of the ‘insights’ mainstream economics claims to have discovered were already known; what’s more, their solutions to the purported problems with “hydraulic” models leave a lot to be desired. Often the only problems with a theory resulted from misinterpretations of particular thinkers, and, properly interpreted, the model offered a credible alternative to the neoclassical approach. Overall the history of economic thought is not really a clear cut story of scientific progression.
Yet Krugman sees things through a ‘Whig‘ perception of the history (of thought), where everything has progressed over time and culminated naturally in what we have now. He thinks that macroeconomics in the 1950s and 60s was similar to Godley’s work, but that it was abandoned for good reasons:
What you might not realize from this passage is that Godley’s notion that we should represent behavior by rules of thumb isn’t something new — it’s something old, which got driven out of macroeconomics. The “hydraulic Keynesianism” of the 1950s was all about viewing the economy as a kind of mechanism in which consumer behavior could be represented by an ad hoc consumption function, investment behavior by an ad hoc investment function, and so on. This produced a more or less mechanistic view of the economy, and AW Phillips famously represented hydraulic macro with a literal hydraulic mechanism.
I’m glad Krugman knows about Phillips’ wonderful MONIAC model. However, economists really misinterpreted Phillips, as this is clear in Krugman’s discussion of his work. His ‘curve‘ – which Krugman goes on to reference – was supposed to be a dynamic model of how unemployment and inflation change over the business cycle, not a static trade off between the two. Furthermore, Phillips’ models also included expectations, one of the supposed strengths of the models that displaced his. What’s more, Phillips was well aware of the problem of how the economy may evolve and change over time or with policy – as he put it:
In my view it cannot be too strongly stated that in attempting to control economic fluctuations we do not have two separate problems of estimating the system and controlling it, we have a single problem of jointly controlling and learning about the system, that is, a problem of learning control or adaptive control.
Krugman doesn’t reference this point – known by the mainstream as the Lucas Critique – explicitly, but this is the major reason “hydraulic” models were abandoned in favour of the ‘microfounded’ models Krugman endorses: it was thought that the latter would not be as susceptible to change with policy. However, this insight had been stated by many long before Lucas – not only Phillips above, but also Keynes – and it is a continual problem, so we cannot ‘immunise’ ourselves from it with microfoundations or anything else. The heterodox economists Krugman dismisses so blithely were actually more alert to the problem than he was, because they didn’t think they had – or could – supersede it.
Krugman now discusses why his favoured ‘optimising’ approach took centre stage in the 1970s and 80s:
So why did hydraulic macro get driven out? Partly because economists like to think of agents as maximizers — it’s at the core of what we’re supposed to know — so that other things equal, an analysis in terms of rational behavior always trumps rules of thumb.
I’m not sure this even counts as a defense of economist’s approach, because it is hopelessly question-begging. Economists shouldn’t model a certain way “because [they] like to”; they should do it because it is more consistent with observed phenomenon. Rational behaviour doesn’t really “trump” anything, as it is largely unobserved in the real world, whether on the part of firms, consumers, governments or what have you. All this point actually demonstrates is how economists can be predisposed toward a certain framework, regardless of predictive success or failure.
However, Krugman thinks that the neoclassical approach has been largely a predictive success when compared with its “hydraulic” counterpart, and puts forward two major points to show this:
First involved consumption spending. Conventional Keynesian consumption functions suggested that the savings rate would rise as incomes rose — and this wasn’t just the Keynesian interpreters, Keynes himself made the same claim….In fact, however, savings rates don’t seem to follow the naive consumption function at all; they rise in booms, and are higher for the wealthy, but exhibit no secular trend. And Milton Friedman appeared to explain this paradox by arguing that people are more less rational: they base consumption on “permanent income”, a reasonable estimate of long-run income, and save temporary fluctuations in income.
First, as Ramanan quickly noted, Wynne Godley’s model did not suggest the savings rate would rise as incomes rose; in fact, it was the opposite. So his model was perfectly consistent with observed behaviour, and there was no need to invoke optimising agents to ‘explain’ anything.
Second, if we were looking for a model of consumption based on human behaviour, Friedman’s permanent income hypothesis – where people spent money as a function of their total lifetime, rather than current income – was not the first or best theory for the job. In fact, it actually displaced a better theory, the relative income hypothesis. This suggested that people’s expenditure was a function of what people around them were spending, or the norms in a society. Poor people’s consumption would be a higher percentage of their income because they were trying to “keep up with the Joneses”; however, as incomes as a whole rose, so would the socially acceptable level of income, so savings rates would not rise with total income. This kind of airy-fairy explanation is like nails on a blackboard for many mainstream economists, but it is more consistent with both the statistical evidence and observed human behaviour.
Krugman’s second point in favour of neoclassical economics is the role of the 1970s stagflation as a vindication of the ‘rational agent’ approach:
In came Friedman and Phelps to argue that rational price-setters would build expected inflation into their choices, so that sustained low unemployment would produce accelerating inflation. And the stagflation of the 70s seemed to vindicate their argument.
Friedman and Phelps’ model may “seem” consistent with stagflation, but there are alternative explanations for stagflation, too, and the question is which one is most closely consistent with the mechanics of the phenomenon. In fact, Friedman and Phelps’ NAIRU theory’s major prediction – that past a certain level of unemployment, inflation will start to increase dramatically – actually has little evidence behind it. On the other hand, Andrew Lainton has pointed out that in Wynne Godley’s Magnum Opus, Monetary Economics, he developed a full model of stagflation that dealt with the 1970s quite competently. On top this this, Godley’s model, as well as similar ones like Steve Keen’s, are also well equipped to explain the recent financial crisis. As Noah Smith once argued, the best theories are those which can explain all phenomena within their domain, and models like Godley’s simply fit this description more closely. But Krugman doesn’t realise this, because he knows very little about the work of Godley and people like him – after all, why bother when they’ve been relegated to the dustbin of progress?
The only problems with economist’s 1950s view of inflation and unemployment stemmed from the ‘bastard Keynesianism’ of the 1950s and 60s, which resulted from misinterpreting Keynes and Phillips and trying to shoehorn them into the neoclassical approach. However, even if we accept ‘bastard Keynesianism’, Krugman’s point is questionable, as the prominent post-war economists Robert Solow and Paul Samuleson were also aware of the potential for the relationship between inflation and unemployment to become unstable. Therefore, claiming that Friedman and Phelps swept in with new, largely successful insights is a stretch to say the least.
Essentially, Krugman believes in a Whiggish conception of the history of thought, where good ideas have driven out the bad, and economics has slowly made better and better predictions. But like all Whig history, Krugman’s opinion rests on arbitrarily placing current theory as the inevitable goal of complex and fractured processes, ignorance of things that don’t seem immediately relevant to these theories, and above all, a good old bit of self-aggrandisation. While I don’t want to tar too many with this brush, judging from the way I was taught, and what I’ve seen elsewhere, it seems that a large part of the discipline thinks this way. But the development of economics has been far more complex, and alternative theories are far more credible, than such a narrative would have you believe.
Posted in Economics on September 6, 2013
I’m in Pieria, taking a brief look at the (often contentious) debate surrounding three books: The Spirit Level, Chavs, and The Shock Doctrine. It’s split into 3 parts, and you can start here:
Over the past few years, there have been some big hitting books from the left criticising inequality, capitalism and ‘free market’ economics or neoliberalism. Naturally, these books have received a lot of criticism from the right. However, sometimes it seems that this criticism is overzealous: an attempt not merely to question the book, but discredit it entirely, and accuse the authors of various misrepresentations of facts and people along the way. Now, while it’s true that some arguments or ideas are essentially ‘just wrong’, and that some proponents of certain ideas can be intellectually dishonest, the frequency with which these accusations are made is alarming, and I believe they are often mistaken.
These books definitely have their flaws. Jones and Klein are both journalistic accounts, which means that they tend to spin things a certain way (Jones refer to TSL‘s thesis as “irrefutable”, which is obviously an exaggeration’). Wilkinson & Pickett’s case is actually stronger than reading their book would have you believe, and they miss some opportunities to really slam dunk the point home, which I found frustrating. In any case, all 3 books are worth your time and are much better than most of the material dedicated to refuting them.
PS I am now going on holiday for a week, so expect little to no activity.
Posted in Economics on August 29, 2013
A short while ago, I tweeted that a show entitled “Economists Say the Funniest Things” – where economists opine on issues outside their domain – would make for good watching by those of us who inhabit the real world. Unfortunately, I can’t afford a show, so I’ll settle for a blog post.
I have previously posted on ‘economic imperialism’, but the examples in this post are, to put it bluntly, less serious, often crossing the line into simply silly. Economists sometimes like to transpose their incentive-driven, utility-maximising agents onto complex social problems, and claim that they have discovered the elegant, underlying mechanics underneath all the noise that the other social sciences study. They will also argue that those who object to their framework do it simply because they don’t like or understand maths, or because they can’t stomach the often unpalatable conclusions of the model. In fact, it is these economists who are seemingly unable to comprehend the phenomena they purport to study, preferring instead to solve equations, which they label ‘models’, but which do not actually ‘model’ the world at all, and which often seem to lead the economist to ridiculous conclusions.
I will put a standard disclaimer out there: I’m not so much attacking the entire economics profession as the ‘pop’ economics that you find in books, on the internet and, sadly, sometimes in policy circles. I hope many economists – those who are able to comprehend history, the complexity of human behaviour and above all the difference between models and reality – will find these examples equally absurd.
Economists do psychology
Naturally, the sometimes infuriating Freakeconomics craze could warrant an entire post, as their ‘antics’ have angered many, including other economists. However, I am going to focus here on one of their less covered arguments: a story about incentives, which is at the beginning of their first book. It provides a nice introduction to wrongheaded economic imperialism, as this wooden insistence on how, underneath everything, people are essentially driven by clear incentives, underlies many of economist’s attempts to try their hand at other disciplines.
The story goes like this: an Israeli day care centre found that parents were picking up their children too late, so they introduced a small charge of $3 to try and disincentivise lateness. However, instead of discouraging this behaviour, the payment served to legitimise it and buy the parents piece of mind. The result was that lateness actually increased. Bizarrely, the Freakonomics duo decided that this story is consistent with economist’s way of thinking, and used it as an introduction to the idea that “incentives matter”. They argue that people actually face three different types of incentives: economic, moral and social. The idea is that the charges “substituted an economic incentive for a moral incentive (the guilt)”, with the implication that the daycare centre simply didn’t get the amount right. However, if this were true, treating guilt would be as simple as paying somebody that you had wronged.
The way people respond to incentives is in fact highly complex and unpredictable. Incentives that are too big or too small can have perverse effects. What’s more, how people will respond to any incentive depends on the perceived motives of the person offering it, and the implied motives of the person receiving it. Studies show that incentives can easily backfire if these motives are questionable, something that has had an impact on the field of organ donation: when people were offered money for donating, donations decreased. People simply no longer felt that they were helping people, only that they were making a bit of money. The Freakonomics guys do not engage with any of these well established psychological tendencies; they simply select three arbitrary and incommensurable concepts and proceed as if their analysis were obviously true. But it’s clear that, contrary to their mantra, claiming to be able to predict people’s response to incentives with certainty is simply a fool’s game.
Economists do history
Historians – at least, those who aren’t Niall Ferguson – try to emphasise context, combat euro-centric (and therefore usually capitalism-centric) narratives, and endlessly struggle against ‘Whig’ history, which suggests that history has naturally culminated in contemporary societies. History is therefore a prime stumbling ground for economists, whose models generally take place in a theoretical ‘vacuum’, take capitalist institutions and social relations as a given, and often model the economy as a deterministic time path or as in equilibrium. It seems that economists tend to see the ‘people respond to incentives’ behaviour outlined above as underlying history, and therefore believe that events naturally culminated in capitalistic behaviour; of course, the corollary is that deviations from this were caused by bad policy, externally imposed by governments.
This type of thinking is clear in Evsey Domar’s serfdom model, which attempted to explain the end of serfdom through notions of its profitability to the landowner. The model argues that if land is too plentiful relative to labour, this results in competition among landlords for workers, which drives wages up, and subsequently it becomes more profitable for landlords to use the institutions of serfdom and slavery to ‘put down’ labourers, rather than employ them for wages. Conversely, if land is scarce relative to labour, wages will remain low enough for wage labour to be profitable, and serfdom and slavery will disappear. Domar suggested that this explained the end of serfdom in Russia in the late 19th Century.
To be fair to Domar, he was more than ready to acknowledge the limitations of this model. One person who was less so, however, was Paul Krugman, who has used it as an illustration of why he considers economics the superior framework for social science. According to Krugman, models like Domar’s are an indication of how economics is “rigorous” and makes “generally correct predictions”. This latter characterisation is especially bizarre, because Krugman goes on to acknowledge that there are large areas of history the Domar model doesn’t explain, such as why serfdom was not reinstituted in Europe after the Black Death wiped out a large amount of the labour force, pushing up wages. According to Krugman, events such as these are “puzzles”. Surely they are just an indication that economist’s framework isn’t so great?
In fact, the Domar model actually doesn’t do a great job of explaining its prime example of 19th century Russia. The serf agreement was not simply forced onto peasants, but was a three way deal between the state, landlords and peasants: peasants had rights and were in many ways ‘free’, as long as they produced enough for the gentry, who were subsequently available for the military. What’s more, the 1861 ‘emancipation’ from serfdom was not instituted by the landlords based on considerations of profitability; the move was centrally directed by the state, based mostly on imperialist/defensive considerations after the Russian defeat in the Crimean War. Many landlords were resistant to the change, and though the legislation was passed a large number of restrictions remained, some effectively extending serfdom.1 Overall, the incentive-based behaviour outlined by Domar is irrelevant to the broader story of social and political change.
The root of the issue is the assumption is one that is not atypical in economics: the idea that the capitalist institution – in this case wage labour – is the ‘natural‘, underlying tendency, upon which artificial institutions like slavery and serfdom are ‘forced’. Indeed, Domar repeatedly refers to the wage labourer as the “free man”. But history shows us there are no natural, underlying institutions: capitalist, feudalist and slave(ist?) institutions are all complex, and their introduction is fragmented. Therefore, at worst, the Domar model is trivial: it suggests that if wage labour, serfdom and slavery are all easily available to landlords, they will choose the one most beneficial to them (in fairness, Domar acknowledges in one place that we might “question the need for [his model]“). However, you don’t need an economist to tell you this, and neither would they be able to tell you how such a situation arose in the first place. A historian would.
The next example continues our journey through Russian history, though perhaps that is stretching the definition of the word ‘history’. This one reminds me of a story – probably an urban myth – about a student at the University of Chicago, who fell asleep in one of Milton Friedman’s lectures. Friedman was furious, and demanded the student answer whichever question he had just asked. The student responded “I don’t know the question Professor Friedman, but the answer is a change in the money supply”. It’s a funny joke, until you realise that economists (in this case Irving Fisher*) actually write things like this:
There you have it, folks: belief in socialism is a monetary phenomenon. This is despite the fact that Russia, the centre of Bolshevism, wasn’t really capitalist at the time of its revolution but mostly feudalist, making Fisher’s discussion of workers and employers bargaining largely irrelevant. It was actually the increasing scarcity of land and food – not the instability of money – which robbed peasants of their lot. Fisher’s account also ignores the undeniable role of World War 1 (elsewhere as well as in Russia), which devastated large areas of the country and created an armed, disenchanted underclass accustomed to conflict. Contrary to what Fisher implies, I’m pretty sure that an oppressive regime drafting you for a largely pointless war, or taking away what little you have, does not only “appear to be social injustice”, but is social injustice, and is peripheral to “changes in the buying power of money”, itself usually symptomatic of broader instability – economic or otherwise.
An economist does sociology (and more)
Perhaps nobody better characterises the term ‘Economic Imperialism’ than University of Chicago economist Gary Becker. Becker has used economist’s toolkit to craft theories for everything from crime to addiction to the family, and in fact he won the Sveridges Riksbank Prize for his efforts (yes, it’s a fake Nobel yada yada). Naturally, Becker’s models were praised because they were rigorous and mathematical (a quick google search will reveal multiple people fawning over him for god knows what reason). While Becker himself is quite modest and seemingly well intentioned, his theories about human behaviour are so far from the truth it’s a wonder they have garnered any respect at all.
The first of these, Becker’s theory of ‘Rational Addiction‘ (amusingly parodied in this video), suggests that those who are addicted to drugs are just following a rational long term utility-maximisation plan. This is the sort of thing that a normal person looks at and goes “erm, no”, as it is completely at odds with the internal and external struggles that addicts commonly face. “I’m just maximising my satisfaction” sounds like something an addict will tell you, but analysis of addiction generally has to go beyond that to be of any use.
It almost goes without saying that do not plan their addiction because they think it will maximise their future satisfaction, and is well established people in general do not behave this way. Some economists have tried to use vague data points – such as the evidence that smokers adjust their habits due to expected tax increases – to ‘show’ people are rational and forward looking. However, it is obviously a leap from this highly stylised behaviour to suggest that smokers are perfectly rational and informed forward looking utility maximisers. In fact, the observed behaviour of addicts suggest that addiction is generally involuntary, and people become addicted because they are unaware of, or underestimate, the risks of addiction. Often it is not clear why people are addicted, even (or especially) to themselves.2
On top of this, the actual mechanics of addiction used in the theory are questionable. ‘Rational addiction’ occurs because past consumption of something builds up a ‘stock’ (with typically undefined units), increasing the pleasure you get from consuming it now. However, in the real world addiction is far more complex than this, and is associated with numerous, sometimes conflicting effects. For example, the theory of rational addiction cannot explain the ‘empty compulsion’ addicts feel once the brain has adapted or become satiated, resulting in a disappearance of the ‘high’, but not of the desire to continue, even if the addict’s conscious brain conflicts with this desire. What’s more, different drugs create different reactions inside the brain (not to mention psychological reactions): opiates like heroin tend to mimic certain neurons, whereas alcohol inhibits the brain’s ability to release (and coordinate the release of) neurons. These are disparate processes that cannot be captured by economist’s utility. Conversely, neurologists, psychologists and social workers have models that can explain such nuances, which are certainly the ones I’d turn to if I wanted to understand and deal with addiction.**
Becker’s second major theory of human behaviour is New Home Economics, or the theory of the family, which started with Becker’s 1965 paper on the allocation of time and culminated in his 1981 Treatise on the Family. As would be expected, the theory models families as a collection of rational agents optimising various preferences and operating according to their respective specialisations, and so it can easily be criticised along previously mentioned lines. However, I will not go over these arguments again.
Instead, the critiques I find of interest here are those by feminist economists, who generally take issue with Becker’s almost hilariously stereotypical depiction of the family. The head of the household – implied to be a man – is modeled as an ‘altruistic’, breadwinning agent who coordinates everything and makes sure it is OK, while the rest of the family accept his judgment as in their best interests (in other words, he is a benevolent dictator). Housework is done by the woman (as women have a ‘comparative advantage’ in housework), and is not counted as a contribution to the family pot, implying that said work is not similarly ‘altruistic’. One is forced to wonder whether the theory would be more suited to the 18th or 19th centuries – clearly, it precludes the study of non-traditional families. A real household that looked like this would probably be classed as abusive.
The theory has many other conceptual and explanatory problems. It could be viewed as an attempt to deal with the troublesome existence of the family unit by arguing it can be represented by a single optimising agent, similar to the way some perfectly competitive models deal with the firm. Economist Barbara Bergmann noted that the theory seems to lead to the “conclusion that the institutions depicted are benign, and that government intervention would be useless at best and probably harmful.” Yet this depiction is completely at odds with the obvious fact that families often exhibit conflicting or self destructive behaviour. Bergmann goes further, arguing that Becker’s theory more generally leads to “preposterous conclusions”, among which is the ‘economic argument’ that women should embrace polygamy, and the idea that the decision to have children is only a function of parent’s ‘altruism’ and of the rate of interest. While the theory may be vaguely consistent with a few stylised facts about how income affects families, these are largely trivial and do not need Becker’s theory to explain them.
The third and final theory is Becker’s theory of crime, which unsurprisingly argues that criminals simply perform crimes because the benefits outweigh the costs. Criminals were said to calculate the ‘expected utility’ of a crime, which multiplies the probability of being caught times the price for being caught. Becker’s cost-saving solution was to increase penalties but reduce enforcement, and also to increase enforcement of more costly crimes (which, in practice, means increasing enforcement in wealthy areas and decreasing it in poor areas).
To be fair, Becker always warned against implementing an extreme version of his view, but as is often the case the caveats were not taken on board and ideas like his seemed to have a substantial (negative) impact on law enforcement (the fact that Becker has a blog with notable judge Richard Posner should be a clue that he has an influence on the legal profession). Over the 1970s and 80s, law enforcement seemed to follow the Chicago-style prescriptions: punishments were increased, with mandatory sentencing introduced and incarceration rates rising. Meanwhile, particularly in cities, the number of police officers was reduced, as was general enforcement and surveillance. The well-documented wave of crime that followed/coincided with this, culminating in the late 1980s, led to the realisation that this approach was flawed, at which point different approaches to law enforcement were taken and crime started to go down. (I’m not going to go over the Freakonomics abortion explanation for this, though this paper has been acknowledged to show that at the very least the effect was smaller than they thought).
Criminologists generally find that combating crime requires the opposite approach to the one Becker had in mind: frequent enforcement, modest penalties (note: commenter ‘TheHobbesian’ helpfully provides a link to ‘situational crime prevention‘, which is apparently gaining followers). It turns out that real criminals are not so bothered by the punishment for a crime, within reason, but by the likelihood of being caught. Most criminals do not even consider the punishment at all when committing a crime, particularly because many of them are under the influence of drugs when they do it. What’s more, punishments that are too severe can backfire, either because they end up being impossible to enforce or because, if a punishment is severe enough, a criminal may as well commit a more heinous crime. I expect an economist like Becker might respond that this just shows that criminals have ‘interesting utility functions’. I would respond that they need to get a grip on reality.
Economists are prone to thinking their framework is neat, useful and even universal, but actually it is just quite a naive and one-dimensional view of human behaviour. When economists take their toolkit to other social sciences, they’d like to believe that they ‘simplify’ in such a manner that they get to the ‘underlying’ mechanics of issues; but they actually ‘simplify’ in such a manner that they often assume everything relevant away. This may make for compelling mathematics and entertaining books, but when we actually venture out into the real world these theories at best only to touch on the surface of the story; at worst, they simply become absurd.
**A part of me says that someone like Becker probably wouldn’t rely on his theory, either. There is a joke about an academic economist who was offered a position at another university, and was conflicted about the choice. One of his students asked him why he didn’t simply choose the rational option. Puzzled, the professor responded “come on, this is serious”.
1. Crime, Cultural Conflict, and Justice in Rural Russia, 1856-1914 by Robert Frank, pp. 7
2. The Theory of Addiction by Robert West, pp. 32-36, 75