Shadow-boxing with reality

Mulling over the debate under way about general equilibrium and macroeconomics, I picked up Paul Samuelson’s Foundations of Economic Analysis for the first time in ages. In the foreword to my 9th (1979) edition, he wrote: “In a hard, exact science a practioner does not really have to know much about methodology. … By contrast, a scholar in economics who is fundamentally confused concerning the relationship of definition, tautology, logical implication, empirical hypothesis and factual refutation may spend a lifetime shadow-boxing with reality.  In a sense therefore, to earn his daily bread as a fruitful contributor to knowledge, the practitioner of an intermediately hard science like economics must come to terms with methodological problems.” Hmm. We have a lot of shadow-boxers, I fear.

(Samuelson adds: “I stress the importance of intermediate hardness because when one descends lower still, say to certain areas of sociology that are almost completely without substantive content, it may not matter much one way or the other what truths or errors about scientific method are involved – for the reason that nothig matters.” Although this probably reflects the view of some economists still, it’s clearly wrong. Financial regulators might not be paying attention to the sociology of banking but they should be – see for example Swimming With the Sharks.)

Interestingly, the early reviews quoted on the back of this edition make it clear that it was seen at first as a book about economic methodology, specifically price theory, rather than a book setting out economics in equations, which is how it was introduced to me back in the day. Rather optimistically, Samuelson also says in the introduction that whereas every educated person used to need to know their Milton and Hazlitt, Greek and Latin, now they should read a mathematical exposition of basic economic theory. Although the book ran to many editions, I suspect it has had few readers who were not economics students. Fewer still these days – all the editions available on Amazon seem to cost a minimum of around £50, though there’s a $40 edition on Amazon.com.

The state of economics

I just started reading The Nobel Factor: The prize in economics, social democracy and the market turn by Avner Offer and Gabriel Soderberg. I thought it was going to be more or less a history of the economics Nobel prize – which pedants always want spelled out as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Judging from the introduction and 1st chapter, it is more about the role awarding the Nobel prize played in the increasing orientation of economics as a subject toward the free market version emphasising deregulation and individualism. The book points out that “abstract theory peaked in the 1980s” – but the legacy of the deliberate ideological use of rational expectations/real business cycle economics has lingered in the policy and political worlds to this day. The book’s first chapter demolishes these macro models, rooted in ‘microfounded’ general equilibrium models, describing them as ‘surreal’ and ‘lacking respect for reality’. What I’m interested to find out is how the authors argue the Nobel Prize assisted this turn, for many of the recipients were somewhat maverick, working against the tide – think of Herb Simon, or Danny Kahneman, James Tobin and Robert Solow. Anyway, it looks like a good companion to Daniel Stedman-Jones’s account of the Mont Pelerin Society and its acolytes in right wing think tanks, Masters of the Universe.

The Nobel Factor might have caught the moment. Paul Romer’s excellent paper about the state of macroeconomics has made waves. Simon Wren-Lewis has made some interesting points about it. There is an excellent Beatrice Cherrier tweetstorm about rational expectations, well worth looking up. The ESRC is looking to create a macroeconomics network encompassing non-mainstream approaches. Eight years after the crisis, the moment for this debate has arrived.

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What next?

All of a sudden a wave of enticing-looking books has arrived. I’ve read the proofs of Tim Harford’s new one, Messy – not allowed to review that until closer to publication date in early November, but it’s terrific of course. I need to hold off on Richard Baldwin’s The Great Convergence, which I’m desperate to read, because it also isn’t published until November. But all of these others look tempting too. Which to pack in my bag today?

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Humans need not apply

As one would of course expect from the economics correspondent of The Economist, Ryan Avent has written a very clear account of the way digital technologies, and the globalisation driven in part by technology, is changing the ways people can earn a living. The Wealth of Humans: Work and its Absence in the 21st Century brings together the debate about robots destroying jobs, arguments about the ‘death of distance’ and literature on the re-emergence of cities as economic hubs, the issue of inequality, and the more recent discussion of whether or not the world is in for an era of ‘secular stagnation’. The focus is on three related trends: automation, globalization, and the enhanced productivity of a highly skilled minority of people.

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It ends up being a rather pessimistic synthesis. The starting point is unarguable: “Society must go through a period of wrenching political change before it can agree on a broadly acceptable social system for sharing the fruits of this new technological world.” A few years ago this would have seemed hyperbole, but no more. And yet the rest of the book tends to suggest that this political change cannot happen. Essentially, Avent does not believe enough people can become educated or skilled enough to share the benefits of automation and globalisation with those happy few whose cognitive skills have made their incomes increase. He does not think as many as 50% can complete tertiary education. “The proportion of highly educated workers to less educated workers is no longer going to grow in the growth-boosting, inequality-dampening way it once did.”

Part of this, I’d take issue with. I don’t agree that skill upgrading has ‘run out of steam’. The character of tertiary education clearly needs to change; we are in a stage like the persistence of classical education in the late 19th century. The educational establishment is slow to change – but it will, or it will be disrupted. But I’m much more persuaded by James Bessen’s argument (in Learning by Doing) that in the later stages of the technological transformation of production, the necessary skills are steadily standardised and thus able to be codified and taught. And, while addressing the ‘lump of labour’ fallacy, Avent nevertheless argues that, “The problem is the sheer abundance of labour.” Yet he also sees technology replacing ‘expensive’ labour. Surely labour=people=knowledge, pretty key in an endogenous growth, knowledge-based economy. It seems more likely that ‘work’ will be redefined, with a role for appropriately skilled humans, as it has been so many times before.

There are some very nice details indeed in the book. I didn’t know that Robert Gordon used to ask audiences whether they would rather give up post-2000 technology or indoor plumbing – the answer used to be the former, until smartphones came along. And indeed in the developing world, people would clearly rather have their phones and the internet. (An aside: indoor plumbing is a great example of why technology is social more than it’s technological. It’s a simple and well-known technology, yet one many countries are unable to make work for them.) Arvind Subramanian’s term ‘fluff not stuff’ for weightlessness (cf The Weightless World) was new to me, although perhaps a little too derogatory-sounding for the source of most of the value-added in developed economies.

Avent concludes that the reason to be pessimistic is that there is ‘no-one in control’, able to pilot society wisely through the upheaval. Looking back over the past 200 years, someone thinking they are ‘in control’ seems a pretty bad idea to me. But, to get back to the starting point, the politics, I’d agree that this is the territory for pessimism. Where leadership to generate a sense of progress and confidence would be desirable (because expectations matter no end for the economy), we have politicians reacting to people’s fears. It’s understandable, but it isn’t what we need.

Public policy reading

Frederico Mollet on Twitter set me a good challenge: some general reading for someone about to start a masters in public policy. Here is a list of suggestions, ten books*, accessibly written, with a bias towards economics and the rationale for economic policy. As ever, more ideas will be welcome.  I’m particularly keen to hear recommendations of this kind of book by female authors – this is a shockingly male list.

The first three are my all-time favourites and I think everybody ought to read them.

Seeing Like A State James Scott

Reinventing the Bazaar John McMillan

Micromotives and Macrobehaviour Thomas Schelling

Who Gets What and Why Alvin Roth

What Money Can’t Buy: The Moral Limits of Markets Michael Sandel

Economics Rules Dani Rodrik

Madmen, Intellectuals and Economic Scribblers: The Economic Engine of Political Change Edward Lopez and Wayne Leighton

Poor Economics Esther Duflo and Abhijit Banerjee

The Idea of Justice Amartya Sen

Other People’s Money John Kay

Economic fables Ariel Rubinstein

The Blunders of Our Governments Anthony King and Ivor Crewe (UK examples only, pretty funny)

PS * approximately 10 as I kept having ideas

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