Sharing the economic growth

Thanks to a recommendation from Martin Wolf, I’ve just read Theoretical Welfare Economics by J de V Graaff, a 1971 reprint of a 1957 primer on this subject – Martin told me it had been his university text. While in my undergraduate course we certainly covered welfare economics, it was as a settled body of knowledge, and I don’t recall reading anything like this on the earlier debates.

It’s a very clear and interesting discussion – succinct too, at about 150 pages. One of the most interesting aspects is how comprehensively the author demolishes the idea that questions about the size of the economic pie and its distribution can be separated. He lost the argument in later economics of course – economists assume, and often state, that these are separable. However, the strength of Graaff’s counter-argument is evident. At the formal level, he covers the inconsistency of the Kaldor/Hicks notion that losers from a change in allocation can (potentially) be compensated – Skitovsky originally showed that the (potential) Pareto optimality of any change depended on the initial distribution. (Here is a good Interfluidity explanation.) But the book also explains it far more intuitively:

“In a one commodity world some definite meaning could be attached to a phrase like ‘the size of national income'; and we could legitimately  say that welfare depended on the size and the distribution of this one commodity. But as soon as we leave a one-commodity world this ceases to be true. There is no unambiguous meaning we can attach to ‘the size of national income’ when we have a heterogeneous collection of goods and services. How can we combine the various goods into a single quantity that can be said to have a ‘size’? By weighting them and striking an average? This is certainly a possibility. But we can only get the relevant weights from a welfare function; and if we have the usual Paretian one … it will only tell us what weights to use when the distribution of goods among members of the community is given. Only in a very limited sense can welfare be said to depend on ‘size’ and ‘distribution’ – for the two elements are no longer independent and cannot be separated out.” [my italics]

He adds that the index numbers usd in constructing national income cannot be an indicator of change in welfare – they simply provide information relevant to a balanced judgement. “Index numbers of aggregate output or consumption should always be supplemented with information about the distribution of income and wealth – and also with separate indexes of investment, personal and collective savings, and expenditure on collective goods like defence. The more informatio made available, the more likely it is that a balanced judgement will be obtained.”

So here I think we have one of the earliest arguments for the ‘dashboard’ approach to measuring economic progress. But also an irrefutable case – with as many singing and dancing cross-partial derivatives as you like – for never leaving income distribution out of an assessment of how the economy is doing.

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Reading Keynes, modernising macro, and modelling

Geoff Tily has done me the honour of a blog post responding to my brief review here of Randall Wray’s new book, Why Minsky Matters. Geoff likes it that I criticise modern macroeconomics (he doesn’t perhaps realise that I’ve been in trouble before from macro friends like Simon Wren-Lewis for being so sceptical about the state of scientific knowledge about the aggregate economy; I want to criticise a wider range of modern macro than they do).

Geoff doesn’t like my statement that arguments over how to interpret Keynes are not interesting, which had as a by-the-way an observation that precision about meaning is an advantage of mathematical modelling. Reading my post back, it comes across as unnecessarily dismissive of Keynes. Of course he is an important figure, who did have things to say of relevance to the crisis if only people had remembered in time.

Having said that, his imprecision was exactly what opened the door for subsequent economists to interpret what he said and give it traction by formalising it. So I stick my argument that formal models are important even though one will always need words AS WELL to say the things that can’t be modelled.

And actually – sorry Geoff – it isn’t debating what Keynes really meant that is of interest, but the contrasting economic arguments and the evidence that can be brought to bear. This might seem like nitpicking but there is a tendency to scholasticism if the debates are conducted in terms of what somebody (no matter how significant a figure) really meant or not. Reading Keynes is important, modernising macro is essential, and economists need both maths and words – an interior solution is definitely better here than a corner solution.

So, with that response, I encourage those who haven’t to read The General Theory – and what a shame there is no high quality, reasonably priced paperback edition at present.

 

Economics and evolutionary science

I recommend this Evonomics post about economics post-2008, and the kind of re-evaluation that’s been going on among economists, citing somewhat critically Noah Smith and also Dani Rodrik’s excellent Economics Rules. Author David Sloan Wilson complains: “All good, but there is something missing from the internet links that I just provided—any discussion of evolutionary theory.”

I couldn’t resist preening a little, for my 2007/2010 book The Soulful Science: What Economists Really Do and Why It Matters, has a whole chapter, Murderous Apes and Entrepreneurs, about the importance of the links between economics and evolutionary biology. This also forms one strand of my 2012 Tanner Lectures. In other words, I wholly agree with the argument of the Evonomics post, but thhink there has been a little bit more progress than it acknowledges.

Of course, formal evolutionary theorising is not part of the conventional economics mainstream, although it has some distinguished practitioners; but having said that informally it widely informs much business economics. There are also some leading economists who have been thinking about the overlap between economics and evolution. The ‘murderous apes’ of the chapter title was inspired by Paul Seabright’s brilliant The Company of Strangers: A Natural History of Economic Life; Wilson cites Robert Frank’s The Darwin Economy. There is also an active strand of research on complexity theory, which Paul Ormerod and Alan Kirman among others have written about.

Economics will have to be consistent with what we learn about human behaviour and decisions from other human sciences, not just the other social sciences, but also evolutionary biology, cognitive science and psychology.

Public vs private – not

I’ve been looking at a very handy little book The Public Sector Fox: Twelve Ways to become a brilliant Public Sector Manager by Marcial Boo and Alexander Stevenson. It is exactly what the subtitle suggests, a book of advice for people running public sector organisations, much of which would also apply to non-profits. The book divides the necessary skills into the personal (eg commitment, resilience), the basic (being strategic, gathering information) and the practical (finance, communication etc). Each chapter gives tons of straightforward, practical advice. It is also of our times – for example, it urges readers to regard being open with data and information as a strength and to do so as much as possible. I thoroughly approve. I’m not usually keen on anything self-helpy, but this is a very practical, useful book.

 

It’s interesting to compare this book with a previous excellent manual of advice, How to Be A Civil Servant by Martin Stanley. There is of course a distinction between the Whitehall civil service and everyday public sector management, between the analysis and giving of advice to ministers through the implementation of policies to the everyday management of public services.

But there are common threads as well. The thing that stands out is the emphasis in both books on commitment to the ideal of public service. “You care deeply about what you do, and about the people your work will help,” write Boo and Stevenson, describing their ideal public sector ‘fox’ (referring of course to Isaiah Berlin’s 1953 The Hedgehog and the Fox – “The fox knows many things…”).

For 25 years or more there has been a habit of looking down on civil servants and public sector managers, in contrast to the supposed efficiency of the private sector. But of course the contrast is a false one. There is lots of bad management in the private sector, lots of it  – in fact, many private sector folks would also benefit from reading these books. And managing in the public sector is far, far more complex than many private sector contexts, in a far, far less forgiving environment. So the jobs are more different than often supposed, and the level of performance more similar.

Mainstream macro and Minsky the maverick

I was one of the many economists who had barely heard of Hyman Minsky, still less read any of his work, before the financial crisis. One of the many who, seeking to understand, quickly devoured his Stabilizing an Unstable Economy. And found it pretty sensible. Macro isn’t my field, but there didn’t seem to be anything in that book a sensible mainstream macro person should have objected to. Should being the operative word. Because of course everyday, mainstream DSGE models in use in 2008 ruled out the very possibility of a crisis, whereas Minsky believed in their inevitability in some shape.

This week I’ve been reading Randall Wray’s Why Minsky Matters, which is a useful and accessible overview of both what Minsky said and – as the title puts it – why it matters. I recommend the book (perhaps particularly to mainstream macro people!).

The first chapter gives an overview of Minsky’s arguments. The second chapter was to me the most interesting. It’s called ‘The Road Not taken’ and sets out the broad mainstream approach against which Minsky developed his arguments. This is the neoclassical synthesis, whose foundations were laid by John Hicks and Alvin ‘Secular Stagnation’ Hansen in the early years after Keynes’s death, then by both ‘Keynesians’ like Patinkin and Tobin and ‘Monetarists’ such as Friedman. Wray argues that these camps disagreed largely over parameter values, and that they essentially bowdlerised Keynes by ignoring his emphasis on investment, finance and uncertainty.

Debates about what Keynes ‘really’ meant in The General Theory are not all that interesting – and by the by a good reason for emphasising the importance of maths as well as words in economics. The mathematical notation is a way of enforcing logical consistency and expressing arguments with precision; the words can then explain more clearly, and introduce reality while keeping it rooted in logica and clarity. Anyway, what’s interesting about the chapter is its brief account of how finance vanished from macro, to our great cost.

The later chapters of Wray’s primer set out Minsky’s views on specific issues, starting with his now-famous financial instability hypothesis: that market forces must be constrained in finance to prevent instability, but the consequent stability is itself destabilizing. The final chapter ends with some thoughts about how to proceed in the face of this paradox – in Wray’s view, tougher regulation especially of the shadow banking sector, and a smaller financial sector overall focusing on industrial investment. I agree, not least because the contribution of the sector to GDP is overstated (as Sir Charles Bean also pointed out in his recent interim report on economic statistics), and its contribution to economic welfare might well be a net negative.

This seems like common sense. I don’t entirely understand the unwillingness of the political classes to address the finance problem (despite the lobbying and campaign contributions)  – will it really take another crisis? The reluctance of people who did pre-2008 macro to ditch their human capital is entirely understandable, and I’m constantly told that anyway there has nevertheless been a lot of change in macroeconomics. Still (and to repeat, this is not my field) I’d be interested to know what proper macroeconomists think about Minsky now. If Minsky is still, as the book jacket claims, a maverick shunned by the mainstream – why?