Tag Archives: economics

Shadow-boxing with reality

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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

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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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Post-truth rhetoric

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Mark Thompson’s new book [amazon_link id=”1847923127″ target=”_blank” ]Enough Said: What’s Gone Wrong with the Language of Politics?[/amazon_link] might seem a bit off-topic for a blog covering economics books. But the EU referendum campaign put debate about economics on the frontline. According to opinion polling, nearly 90% of professional economists in the UK agreed a Leave vote would prove harmful to the economy (by the way, not all in the two months after the vote – it’s an assessment of longer term trade and investment prospects). Economists were also among those pointing out that the claim of £350m a week extra for the NHS could not be a true claim because the UK’s net payment to the EU is nothing like so big (so did the UK Statistics Authority; and indeed, the claim has now been dropped by the Leavers – nowhere to be seen on their website). As a consequence, Brexit campaigners dismissed ‘experts’ and indeed Michael Gove, a senior politician, compared 300 who signed an open letter to the newspapers (including me) to Nazi scientists. (He did later apologize.)

[amazon_image id=”B019CGXR6G” link=”true” target=”_blank” size=”medium” ]Enough Said: What’s gone wrong with the language of politics?[/amazon_image]

Of course, it isn’t just Brexit. Step forward Donald Trump. Populist politics everywhere are ‘post truth’. Mark Thompson’s book is about the language of this phenomenon. He looks at issues such as climate change, the MMR vaccine; at the arrival of spin techniques; at distrust in politics. He analyses the highly effective rhetorical techniques used by the post-truthers, and the role of the media in amplifying the phenomenon. It isn’t just social media and polemical online news entities, although they play a large part. Thompson also points the finger of blame at traditional quality news organisations – including the BBC, of which he used to be Director General – for falling for the idea of ‘false balance’. In other words, that every pro-Remain economist must be balanced by one of the eight pro-Leave economists. I’m not sure he would have taken a different tack, were he still in the job earlier this year: the relentless right wing attacks on the BBC’s funds, on its supposed ‘bias’, on its independence have undermined its editorial confidence. However, I do agree with him about its referendum coverage, as do Ivor Gaber of the Political Studies Association and the Electoral Reform Society, which considered coverage by the public service broadcasters too combative, like a Punch and Judy show rather than a serious deliberation.

Experts get part of the blame too, for a failure to communicate. Technocrats deploy a ‘weirdly affectless and dehumanised style,’ he writes. I hope not me, but certainly agree economists need to try harder to communicate. This faultline between technocracy and popular democracy has been a long time in the making, though: Daniel Bell warned about it in [amazon_link id=”B00I61SKOI” target=”_blank” ]The Coming of Post Industrial Society[/amazon_link]. Unfortunately it’s clear that politicians and media (of all kinds) are locked into a vicious circle of neither side being able to discuss real trade-offs or hard choices. So that only really leaves the experts. And Thompson points out that expert language needs to change. It cannot stick with reasoned argument , but needs to add the appeal to emotion and the badge of good character (to complete the triad of traditional rhetorical tools). “Technocracy is itself a product of the rationalist enterprise, so we shouldn’t be surprised when today’s policy experts contrast their world of evidence-based and hyper-rational discussion with the irrational language world of retail politics.” Not surprised, but clearly we need to extend our repetoire to persuade others.

Not surprisingly, though, Thompson’s book is weaker on solutions than on diagnosis. After all, the degradation of public discourse, the post-truth world, is a difficult and entrenched problem a long time in the making. But for the analysis – and the insights from a distinguished and experienced journalist and news executive – the book is well worth a read.

 

A rant about markets

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Harvey Cox’s [amazon_link id=”0674659686″ target=”_blank” ]The Market As God[/amazon_link], published in a couple of weeks, drove me nuts. I alternated between scribbling ‘X’s and ‘?!’s in the margin, and skipping over long chunks about Christian theology, in which I have zero interest. The book is built out from the notion of orthodoxy and heterodoxy in economics. Of course, ‘orthodox’ economists would use an adjective like ‘mainstream’ to describe themselves, which I guess (self-described) heterodox economists would say is the point. These debates always seem to me more relevant (or rather less irrelevant) to macro than to the empirical applied micro-economics so many of us do; I never know which label to wear myself.

[amazon_image id=”0674659686″ link=”true” target=”_blank” size=”medium” ]The Market as God[/amazon_image]

Anyway, back to the book. The conclusion sums up the message: “First, the Godlike role The Market now exercises is misplaced, and the web of values, narratives and institutions it anchors needs to be critically re-examined. Second, precisely because The Market, despite its disavowals, does operate as a surrogate religion, the kind of rethinking that is needed has been deflected and discouraged.”

Many people will agree with this. I’d guess the ever-thoughtful Branko Milanovic would – he and I had a brief debate here, here and here on ‘commodification’ (ie the status of the market) recently. There are some truly interesting ethical questions in this territory.

Not in this book, however. One of my problems with Cox’s account is the assumption that there is substantial overlap between people who worship The Market and economists, because isn’t that what economics is all about? Given that I teach a whole course exploring the subtleties of the relationship between state and market in public policy, this is personally irritating. It’s also factually incorrect: many economists work on how government/collective intervention can fruitfully bring about higher economic welfare, including by influencing markets. Sure, economists are perhaps more likely than Ms Average to believe markets operate in beneficial ways (or than Mr Average when he is a businessman running a large, dominant company), but that’s far from religious faith in markets.

Market-worship was always more of a political than an economic project, although certainly there was a tide in economics of free-market rational expectations modelling – a tide at its height in the mid to late 1980s. Even the politics seems to be changing. This book comes just as here in the UK we’ve seen the new Conservative Prime Minister pronouncing the need for an industrial policy, while the system shock of the Brexit vote/Trump propularity has alerted the political classes in both the UK and US to the fact that we’re not in libertarian free market-land any more.

There were also minor irritations in the book. For instance, it paints Adam Smith as the ‘saint’ of modern economics, “the patron of the unfettered free market.” This overlooks a raft of recent work highlighting the importance of [amazon_link id=”0143105922″ target=”_blank” ]The Theory of Moral Sentiments[/amazon_link] to any interpretation of Smith – from Emma Rothschild’s [amazon_link id=”B00BNRMO08″ target=”_blank” ]Economic Sentiments[/amazon_link], Nicholas Phillipson’s biography [amazon_link id=”B003VTZRR8″ target=”_blank” ]Adam Smith: An Enlightened Life[/amazon_link], through [amazon_link id=”B01K3PL3FC” target=”_blank” ]Roger Backhouse’s history of economics[/amazon_link] to Russ Roberts’ [amazon_link id=”0241003202″ target=”_blank” ][amazon_link id=”1469029758″ target=”_blank” ]How Adam Smith Can Change Your Life[/amazon_link][/amazon_link].

Anyway, it will be clear that The Market As God falls foul of my regular gripe that it would be great if critics of economics from outside the discipline had more of an idea of what economists actually do. It would have been far more interesting if Cox had addressed, say [amazon_link id=”0007520778″ target=”_blank” ]Al Roth[/amazon_link]’s question about repugnant markets, kidney exchanges etc. Or maybe the questions raised by behavioural economics about when humans are more or less rational than pigeons or capucin monkeys. Still, if you enjoyed Michael Sandel’s What Money Can’t Buy: The Moral Limits of Markets[amazon_link id=”B00BW8NBMS” target=”_blank” ]What Money Can’t Buy: The Moral Limits of Markets by Sandel, Michael on 26/04/2012 unknown edition[/amazon_link] (which also irritated me hugely), you might well like this book too.

Economic thought and its idiosyncracies

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This weekend my reading was [amazon_link id=”0231172583″ target=”_blank” ]Economic Thought: A Brief History[/amazon_link] by Heinz Kurz. It really is brief, just 183 pages, starting with the Ancient Greeks and ending with behavioural economics and RCTs. So it sets out the broadest outlines of economics, with a strong bias towards macroeconomics and thinking about economic systems. Marxism is covered – indeed, gets a whole chapter of 14 pages – but industrial organisation is absent save for a bit of Schumpeter and a bit of new institutional economics.

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Within its self-imposed limitations of space and selectivity, the book does a decent job in outlining the key features of, say, classical thought and the marginalist turn – for example, Kurz emphasises the introduction of the emphasis on the flow of commodities produced each year in classical thinking. I learned a few new names: Hermann Heinrich Gossen, anyone? I hadn’t heard of him before, but learn here that he introduced the earliest version of marginal utility theory. I thought the discussion of utility theory is particularly good. Kurz writes:

“Compared with cardinal utility theory, ordinal utility theory – with its rejection of interpersonal comparisons – dramatically privileges the individual relative to society. In this perspective, the individual, one might say, is in principle attributed a right to veto public decisions that affetc his or her (subjective) well-being … As a consequence, economic policy seems unable to improve social situations. Since every policy alternative has some gainers and som losers, how could one ever judge the gains of the former against the losses of the latter, if interpersonal utility comparisons are prohibited?”

Very clear. There are a couple of other points where Kurz highlights interesting and deep methodological issues – another one, for instance, critiques Heckher-Ohlin-Samuelson in terms of its assumption of a single homogeneous ‘quantity of capital’. And in a short section on economic geography, there’s the point that in a constant returns to scale world assumed by so much of economics (including productivity accounting), “economic activity will be evenly distributed across a homogeneous plain, carried out by autarkic units of production and consumption.”

So, some nice insights. I did find myself wondering what audience the author had in mind as he wrote. He tries to explain some concepts – indifference curves, Keynesian aggregate demand, Hicks-Kaldor compensation and Skitovsky’s rebuttal – in a couple of pages at most. Economists reading this book wouldn’t need the explainers. Normal people reading it will find these far too condensed and impenetrable. As one of the former group, I’d have traded off the attempts at explanation of basic concepts for some more of Kurz’s critique of the ideas he is covering. Still, this would be a useful book for students just starting to get into the history of thought – one step beyond [amazon_link id=”0140290060″ target=”_blank” ]The Worldly Philosophers[/amazon_link], and a prelude to a bigger book like Saadmo’s excellent [amazon_link id=”B00HRFGZ7I” target=”_blank” ]Economics Evolving[/amazon_link].

[amazon_image id=”067163318X” link=”true” target=”_blank” size=”medium” ]The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers (A Touchstone book)[/amazon_image]  [amazon_image id=”B00HRFGZ7I” link=”true” target=”_blank” size=”medium” ]Economics Evolving: A History of Economic Thought by Sandmo. Agnar ( 2010 ) Paperback[/amazon_image]