Mathematical economics

An intriguing-looking book has just arrived: Finding Equilibrium: Arrow, Debreu, McKenzie and the problem of scientific credit by Till Düppe and Roy Weintraub.

OK, this is a specialist interest, but it’s about the history of the mathematisation of economics via general equilibrium theory from the mid-20th century. The book looks blessedly free of equations too. I did somewhere write a review of Roy Weintraub’s 2002 book, How Economics Became a Mathematical Science and got a rather severe note from him pointing out that I’d made a mistake, so I’m slightly trepidatious about tackling this new one. But the mathematical turn in economics is important to understand. I’m in favour of using mathematical models in economics – indeed, some of the interesting new approaches such as the application if complexity science in macroeconomics would involve more rather than less of it -  but not in favour of only using maths and ignoring institutional and historical detail.

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Not bowling alone

The UK economy is growing at a decent clip now, but the consequences of the long downturn linger on. The distinguishing feature of the post-2008 economic landscape in most western economies is how long growth has been so weak, how long it has taken for GDP to regain its previous peak. The final chapter of Hard Times: The Divisive Toll of the Economic Slump by Tom Clark with Anthony Heath describes the book’s suggestions for tackling the consequences of lengthy economic weakness as “wearyingly familiar.” That doesn’t make it any the less important to be reminded by this book of the social impact of the seven lean years since the Great Financial Crisis. Too often, discussions about the economic issues and the social issues proceed separately, but they are tightly linked.

The book is the product of a five-year research programme conducted by the University of Manchester (my new home as Professor of Economics from 1 September) and Harvard University, directed by Robert Putnam, famously author of Bowling Alone and its fascinating precursor Making Democracy Work: Civic Traditions in Modern Italy. The presentation of those depressingly familiar economic statistics is accompanied by interviews with a range of people affected by unemployment, or precarious employment, or benefit cuts since 2008. It humanizes the – well, “wearyingly familiar” -  statistics and charts.

The human stuff – the social capital – really matters. Hard Times begins by citing a classic (1933) sociological study of the effects of mass unemployment, Marienthal: the sociography of an unemployed community. In this small Austrian town whose mill closed, people were asked to keep diaries, which recorded the loss of energy and social activity. Unemployment brought lethargy and isolation. The alternative in other places during the 1930s was rage.

Other sociologists have demonstrated the importance of social ties in other contexts. One of my all-time favourites is Eric Klinenberg’s Heatwave, which documents the clear impact of different family structures on ‘excess’ death rates during a Chicago heatwave: Hispanic families and neighbourhoods, more cohesive than equally poor African-American neighbourhoods, saw fewer fatalities. Another recent book has pointed to the psychological debilitation caused by poverty, Scarcity by Sendhil Mullainaithan and Eldar Shafir.

It seems, though, that a reminder is needed that money (lack of) matters as much because of the social as well as the economic consequences. Hard Times argues that the roots of a lack of social resilience stretch back before the crisis. “For all the riches of the millennial years, we found swathes of society that were already sorely exposed by that time.” Rising poverty rates before 2008, declining volunteering, drops in marriage rates (in the US) among some disadvantaged groups and of course rising inequality, all “worked to leave more of the vulnerable braving the storm in effective isolation.”

What to do? Well, it is indeed “wearyingly familiar”. Although the book supports the argument made for example by David Clark and Richard Layard in Thrive for additional mental health support, its point is that fundamentally money matters – jobs, a duly enforced minimum wage and decent working conditions, and an adequate safety net. Without an adequate income, and beset by anxiety about financial insecurity, people become isolated. Isolation damages their health and well-being, and causes a vicious cycle of vulnerability and still more insecurity. People with not enough money are not bowling alone, they are just alone.

The economic dilemmas involved in any job market interventions or social security are familiar too, the incentive effects and the trade-offs. But it’s good to be reminded that social consequences should form part of the calculation.

Novelist of the squeezed middle

There’s an interesting feature by Anthony Quinn in today’s Guardian about George Gissing’s New Grub Street, linked to the difficulty authors have today of making a living from their writing. I’m not sure there was ever an intervening stage when all that many people wrote for a living, although digital technology is clearly disintermediating the newspapers and magazines that employed journalists during the 20th century. I don’t know of a data source for total employment by writing, still less income earned.

Anyway, Gissing has long been one of my favourite of the great Victorian novelists, although less well known now than predecessors like Charles Dickens and George Eliot. George Orwell described Gissing as one of the best English novelists, and I think that might be because he shared the same preoccupations, the essentially economic ones of work and income at a time when industrial change is bringing about tremendous economic and social upheaval. Orwell was more concerned with the poorest people, in books like The Road to Wigan Pier and Down and Out in Paris and London, although his novels (Keep the Aspidistra Flying) moved up the income scale. Gissing was a novelist of the squeezed middle.

Writers like New Grub Street – The Guardian likes it so much that they had another feature about it (by Robert McCrum) just a few months ago. The Odd Women and The Whirlpool are my favourites.

  

Advice for madmen

Madmen, Intellectuals and Academic Scribblers: The Economic Engine of Political Change by Wayne Leighton and Edward López has been out for a while but I’ve just read it. The Madmen are politicians or policy makers, the Scribblers are academics, scholars, generating new ideas, and the Intellectuals are those who translate ideas into politically digestible form, journalists, think-tankers, consultants. (I’d have found it more intuitive to reverse those last two labels, but there we are.)

The over-arching aim of the book is to explain why bad economic policies are implemented, why they last so long, and why they are sometimes overcome. The transmission mechanism runs from Scribblers’ ideas to decisions by Madmen, mediated by the competitive marketplace of ideas and entrepreneurs among the Intellectuals and junior Madmen.

This account, not particularly new (indeed, the title is drawn partly from the famous Keynes quotation about madmen in authority), is wrapped around some useful central chapters. These give a clear and concise history of thought that starts with the political philosophy of government (Plato, Aristotle, Cicero, through to Locke, Hume, Marx, and (as it’s an American book) the US Constitution and Pragmatism. This is followed by a chapter on the marginalism revolution in economics and the Pigouvian approach to social welfare as an allocation problem codified by Samuelson, which is contrasted with the Hayekian view of the economy as an organic entity concerned with exchange rather than allocation. It then sets out clearly Coase’s argument about the symmetry of ‘externalities’ and moves on to the start of the public choice revolution. (Including this sentence about James Buchanan: “He was determined to translate Wicksell’s forgotten book [from German] for the English-speaking world.” How marvellous to hear of such a well-rounded economist.)

The book comments: “For all its precision, the great vice of the new welfare economics [of externalities, second best theorem and so on] was to crowd out politics and philosophy. … Economists at mid-century were preoccupied with the pure theory of households and firms and busied themselves with proving equilibrium and devising optimal conditions for allocating scarce resources. Interestingly, the main problem was that many of those optimal conditions included very specific policy choices, like taxing polluters, subsidizing education and deficit spending during recessions. But the people making these policy choices – the madmen in authority – are not part of the economic model.”

A full chapter on public choice theory, voting theorems, Olson’s interest group analysis and the economics of regulation follows. The final chapters set out in more detail the argument about how ideas get turned into policies, and a description of four US examples: radio spectrum, air traffic control, welfare reform and the housing bubble and sub-prime crisis. Of these, the first example generalises most easily to other countries.

The book is very clearly written and an accessible introduction to an important strand of the history of economic thought that is still highly relevant to policy debates today. The three core chapters and the examples make it an extremely useful introductory or background resource for students, and I’ll certainly add them to my reading list for next semester. The final chapter does also end with good advice for wannabee policy entrepreneurs: “Improving the human condition should start with recognising that people respond to incentives, and that incentives are part of institutions that neither rise nor fall overnight, and that the slow emergence of both good and bad ideas can change these institutions and thus have an enduring impact on the human condition. … Ideas indeed can have consequences.”