Archive for category Economics
I rarely (never) post based solely on a quick thought or quote, but this just struck me as too good not to highlight. It’s from a book called ‘Capital as Power’ by Jonathan Nitzan and Shimshon Bichler, which challenges both the neoclassical and Marxian conceptions of capital, and is freely available online. The passage in question pertains to the way neoclassical economics has dealt with the problems highlighted during the well documented Cambridge Capital Controversies:
The first and most common solution has been to gloss the problem over – or, better still, to ignore it altogether. And as Robinson (1971) predicted and Hodgson (1997) confirmed, so far this solution seems to be working. Most economics textbooks, including the endless editions of Samuelson, Inc., continue to ‘measure’ capital as if the Cambridge Controversy had never happened, helping keep the majority of economists – teachers and students – blissfully unaware of the whole debacle.
A second, more subtle method has been to argue that the problem of quantifying capital, although serious in principle, has limited practical importance (Ferguson 1969). However, given the excessively unrealistic if not impossible assumptions of neoclassical theory, resting its defence on real-world relevance seems somewhat audacious.
The second point is something I independently noticed: appealing to practicality when it suits the modeller, but insisting it doesn’t matter elsewhere. If there is solid evidence that reswitching isn’t important, that’s fine, but then we should also take on board that agents don’t optimise, markets don’t clear, expectations aren’t rational, etc. etc. If we do that, pretty soon the assumptions all fall away and not much is left.
However, it’s the authors’ third point that really hits home:
The third and probably most sophisticated response has been to embrace disaggregate general equilibrium models. The latter models try to describe – conceptually, that is – every aspect of the economic system, down to the smallest detail. The production function in such models separately specifies each individual input, however tiny, so the need to aggregate capital goods into capital does not arise in the first place.
General equilibrium models have serious theoretical and empirical weaknesses whose details have attracted much attention. Their most important problem, though, comes not from what they try to explain, but from what they ignore, namely capital. Their emphasis on disaggregation, regardless of its epistemological feasibility, is an ontological fallacy. The social process takes place not at the level of atoms or strings, but of social institutions and organizations. And so, although the ‘shell’ called capital may or may not consist of individual physical inputs, its existence and significance as the central social aggregate of capitalism is hardly in doubt. By ignoring this pivotal concept, general equilibrium theory turns itself into a hollow formality.
In essence, neoclassical economics dealt with its inability to model capital by…eschewing any analysis of capital. However, the theoretical importance of capital for understanding capitalism (duh) means that this has turned neoclassical ‘theory’ into a highly inadequate took for doing what theory is supposed to do, which is to further our understanding.
Apparently, if you keep evading logical, methodological and empirical problems, it catches up with you! Who knew?
How economics is taught has been the subject of a lot of debate recently. Although there have been a lot of good points made, in my opinion Andrew Lainton‘s recent blog post hits the nail on the head: we need to begin economics education with a discussion of key, contested ideas.
Starting with contested ideas has a few major benefits. First, it immediately shows students what economics is: a subject where there is a lot of disagreement, and where key ideas are often not well understood, even by the best. Second, it allows students to grapple with the kinds of critical questions that, in my experience, people generally have in mind when they think of ‘economics’: where do growth, profits come from? How do things ‘work’? Third, it allows us to intertwine the teaching of these concepts with economic history and the history of thought.
Lainton’s key contested idea is savings: how naive national accounting might make you believe that saving instantly create investment; how Kalecki and Keynes showed that it’s closer to the other way around; and onto modern debates that add nuances to these simplified expositions. Naturally, this would also tie in with debates about the banking system, loanable funds and endogenous versus exogenous money. On top of ‘savings’, I can think of quite a few other important economic ideas that are not agreed upon, but are central to the discipline:
Decision making and expectations
How do people make decisions? This question is clearly central to economics, as any economic model that explicitly includes agents must make some assumption about what drives these agents’ decisions. In modern economics, an agent’s decision rule generally rests on seeking some form of ‘gain’, whether subjective satisfaction or simply units of money. Economists themselves have also, to their credit, pushed behavioural and even neurological investigations into decision making. However, much of this has yet to filter down to the main models/courses, even though it should really be at the forefront of economic modelling.
All too often, the most mathematically tractable models such as utility maximisation and rational expectations are simply assumed, perhaps with caveats, but not with any real discussion of whether they represent human behaviour. Well established psychological characteristics and behavioural heuristics/biases are ignored, even though they may alter the analysis of choice in fundamental ways. Public officials are often assumed to follow behaviour that creates their personally preferred outcome, despite important evidence to the contrary. It is assumed the public understands the fundamentals of the economy, even though a lot of evidence suggests this is way, way off. Decisions in the workplace that concern morale, hierarchy and norms are often disregarded, despite evidence that they are of utmost importance.
However, my point isn’t necessarily about which models are right or wrong. It’s that these debates about how people act, and based on which motives and expectations, are not only incredibly interesting but are incredibly important. Such debates could also tie in with a comprehensive discussion of the Lucas Critique – not as a binary phenomenon that can be solved with microfoundations, but as an ongoing problem that requires us to evaluate the way the parameters of the economy change over time and with policy, culture and so forth. This would allow students to see how the economy evolves, and how its behaviour depends on fundamental questions about human behaviour.
Theories of value underlie economic theories, whether economists like it or not – in fact, it’s pretty difficult (impossible?) to judge the “performance” of the economy without a theory of value. Classical economics was built on the Labour Theory of Value (LTV), and distinguished between the price of an object (exchange-value) and its value to whomever used it (use-value). Marginalist economics is built on the Subjective Theory of Value (STV), which tends to combine use and exchange value into mathematically ordered preferences. GDP calculations simply measure ‘value added’ as a monetary quantity. There are also other, albeit less popular, theories of value, such as those based on agriculture and energy.
A crucial point here is that the concept of ‘value’ is not necessarily well-defined, and each theory of value generally has something slightly different in mind when they use it. For the (Marxist) LTV,value refers to an objective quality: the total productive ‘value’ in the economy, which is expressed as an exchange relationship between commodities, and originates solely from labour. For the STV , value refers to the subjective ‘surplus’ gained from transactions, which neoclassical theory seeks to optimise to maximise social welfare. For theories of value based on the natural sciences, value refers to more physical qualities, such as how energy is transformed in production and the limits to this process. However, the common ground between theories is the question of how we create more than we had – and what to do about it.
I expect a lot of economists would regard the STV as largely obvious and not up for debate, but if it’s so obvious and important that’s even more reason to study it explicitly – after all, Newton’s Law’s are not tucked away underneath classical physics: they are explicit, and their empirical relevance is frequently demonstrated to students. Clearly, we can’t demonstrate the empirical relevance of a theory of value (hey, it’s almost as if economics is not a science!) but we can discuss it in depth and how it is a relevant and necessary backdrop to formulating theories about utility, surplus and profit.
What is economics?
It’s a testament to how contested the field of economics is that even the definition is not agreed upon. Open a ‘pop‘ economics book and you’ll find a definition such as “the study of how people respond to incentives”. Another popular mainstream definition is “the allocation of scarce resources” or even “satisfying unlimited wants with scarce resources“. Classical economics – and more recently, Sraffians – considers economics the study of how society reproduces itself. Austrians might give you a definition that says something about human action and the market system. The definition given by Wikipedia is “the study of production, distribution and consumption”. I’m sure there are many more out there.
Agreeing on a definition of economics would put the discipline on surer footing. Right now it occupies a space where it is simultaneously used as an all encompassing worldview, and as a very narrow toolkit that only investigates one or two things at a time (I expect many economists would basically consider themselves applied statisticians or econometricians). I sometimes even find that economists fall back on defining economics by “what economists do”, which is a rather weak (and circular) definition. Given that we are not even sure which problems economic theories are designed to understand and solve, is it any wonder people can’t agree on which ones to use?
This post is by no means exhaustive. Off the top of my head, some other relevant contested ideas might be: capital; money; how to measure the economy; different economic systems; institutions; policy and economists’ relationship with it. This kind of approach is surely better for furthering students’ understanding than simply teaching a set of abstract theories which are labelled ‘economics’, often with little critical engagement. It would open students’ minds to the kinds of difficult and relevant questions that are currently either shied away from, or only open to those who have completed an Economics PHD. I expect many would also leave with an understanding of economics closer to what students currently expect (and do not really get) from an economics education.
Since posts have been scant recently (I have things coming up, promise!) I thought I’d do a standard “most popular posts” post. I’ll look at the 5 most popular posts of 2013 on this blog, as well as the 5 posts I most enjoyed writing and the 5 other blogs I’ve enjoyed reading this year. The first list is ranked from highest page-views to lowest, but the others aren’t in any particular order.
Most Popular Posts on This Blog
18 Signs Economists Haven’t the Foggiest (12,857) An off-the-cuff polemic response to Chris Auld’s similar list, this attracted a lot of attention (and ire). I stand by all 18 points in one way or another, although I’ll grant that some (such as 10) are far less common than others (such as 1).
The Dangers of Thinking Like an Economist (10,333) Due largely to a link from Hacker News, this blog post was widely read (apparently by climate change deniers). I actually feel like I didn’t flesh out the analysis as fully as I could have, but the basic points about the ‘economic way of thinking’, and the subjects I highlighted are, in my opinion, important examples of how limiting an economics education can be when discussing social problems.
Yes, Libertarians Really Are Lazy Marxists (6,851). I’m not the first to refer to libertarians as lazy marxists, but I’ve never seen somebody actually write about it in depth. Apparently this struck a chord with a lot of marxists and so was linked to from various commie websites. This surprised me, as I’m not great at political philosophy, but clearly that’s not a necessary condition for being able to criticise libertarianism.*
Sorry, Economists: The Crisis is a Huge Problem for Your Discipline (4,676). Giles-Saint Paul’s exercise in special pleading, attempting to relieve economists from the burden of actually being able to describe the real economy, was one of the silliest things I’ve ever seen written by an economist, which is quite a feat, and it deserved fisking.
Mankiw to the Rescue (of the 1%) (3,545). Another fisking (and another one of the silliest things ever written by an economist), this post concerned Mankiw’s universally derided defence of the top 1% of earners, with its questionable grasp of the facts, 15 year old political philosophy and inconsistent use of economic theory. While it probably wasn’t necessary for me or anyone else to point out the stupidity in Mankiw’s paper explicitly, it was still a lot of a fun to do so.
NB: my FAQ actually got 4,799 views in 2013, but since it was written in 2012 I didn’t count it (and it has the unfair advantage of being linked to in my About section). I’ve also been posting on the website Pieria this year, and though I don’t have access to the views for those posts, a handful of my posts there were on their ‘top 20′ list.
Posts on This Blog I Enjoyed Writing
Economists Say The Funniest Things. ‘Economic Imperialism’ never fails to delight and amuse, and although this post required quite a lot of research, it was probably one of the most rewarding posts I’ve done. Admittedly I was a bit unfair to Irving Fisher in the first draft, but it’s still silly to suggest that workers become socialists largely because of changes in the money supply.
Reconsidering the Labour Theory of Value. The straw man of the LTV that many are willing to refer to as ”discredited” may well be untenable. But the actual theory endorsed by Marx, along with its implications about capitalist crises, is far better for understanding the business cycle than any mainstream economic theory I’ve come across. This post was a thumbnail sketch of said theory.
Whig Theories of the History of Thought. As much as everybody hates Paul Krugman posts, as a blogger you unavoidably find yourself having to do one every so often. Here I tried to counter popular myths about naive Keynesianism and how its practitioners were unaware of the possibility of stagflation (as well as the Lucas Critique). Sadly, this caricature of events is often endorsed by both left and right economists.
In Praise of Econometrics. Since a lot of ‘economists’ are mostly asking specific, relatively boring empirical questions, I thought it would be worth clarifying that most of my criticisms are not directed at this kind of work, which is in my opinion of quite a different nature to the pure theoretical aspects of economics. It is true that problematic theoretical concepts (like production functions) are sometimes used in these empirical estimations, but I think that is a problem of application rather than something more fundamental.
Against Friedman: Why Assumptions Matter. Although it’s not news to anybody except the most dyed-in-the wool economist that the assumptions of a theory must be carefully scrutinised, it was good to compile a comprehensive argument for exactly why this is the case.
My Favourite Blogs of 2013
Matt Bruenig. While there aren’t necessarily any stand-out posts (although this recent smackdown of Ezra Klein is amusing), I never fail to delight in Bruenig’s effortless dismissals of libertarian theories of…well, everything. He also does some good policy analysis (including a basic income calculator), and blogs in a similar vein over at Demos.
Chris Dillow (Stumbling and Mumbling). There should probably be a rule against including Chris Dillow on lists like this – everyone can just agree that he’s a Really Good Blogger. His unique mixture of marxist, behavioural and mainstream economic reasoning makes him both endlessly interesting and frustratingly hard to disagree with, even when he is casually tearing your pet beliefs to pieces. Oh, and his sidebar ‘top blogging’ is always worth a look.
Noah Smith (Noahpinion). Despite the fact that Noah’s dismissive attitude toward heterodox economics irritates me, there’s no denying that he is an excellent and consistent blogger. Naturally, I enjoy his posts on macroeconomics, but he also writes interesting things about Japan, has good overviews of economics debates and makes a lot of interesting political/miscellaneous posts.
‘Lord Keynes’ (Social Democracy for the 21st Century: a Post-Keynesian Perspective). This blog has always been a great source of, among other things, post-Keynesian theories and criticisms of Austrian Business Cycle Theory. However, this year LK pushed the boat out with relentless attacks on both marginalist theories of pricing and Mises’ a priori philosophy. An excellent resource for heterodox economists.
David Glasner (Uneasy Money). I expect most people would agree with me that Glasner is one of the best economic bloggers around. Just a glance at the top right hand corner of his blog undoubtedly reveals a handful of must-read posts. He also wrote one of my favourite blog posts of 2013, That Oh So Elusive Natural Rate of Interest, and did an interesting series on the presumably underrated Ralph Hawtrey’s book ‘Good and Bad Trade‘.
Honorable mentions: Corey Robin, whose blogging and book are both excellent, if a little jargon-filled; Robert Vienneau, who posts consistently interesting stuff on economic theory; Left Outside, who is a great follow and whose series on Karl Polanyi and Beijing is a must-read (even if he does support NGDP targeting); Fuck Yeah, Piero Sraffa! who posts a lot of interesting material, although the blog does some to be a bit on and off.
Happy New Year!
I’m happy to say that I’ve had a few blog posts this year that were viewed as much as the top posts on much more popular blogs like naked capitalism, and also that I made the list of top 200 most influential economics blogs. I had 227,037 views in 2013, which was a massive improvement over 2012. I’m not entirely sure how all of this compares to other blogs overall, but in any case I’m glad to have had a continuous rise in readers/commenters relative to where I was before. Here’s hoping 2014 is just as successful.
What did you enjoy reading this year?
*I know, cheap shot. Sorry.
I have a new article in Pieria, arguing that the image of mainstream economists as rabid 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!
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.
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…
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.
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.
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.
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.