Guest post on the (changing) state of economics

Bringing About Debate and Change in Economics.

By Peter Smith

The financial crisis has raised serious questions about the validity of mainstream economics and whether it addresses some important aspects of reality. This does suggest that at least some radical changes are needed in the core economic models of ‘how the world really is’. I’d like to suggest that outsiders can have a useful role when change of such a radical kind is needed; at the very least, we may have tools and approaches that economists are not familiar with. History is on my side here: some of Thomas Kuhn’s famous paradigm shifts described in his [amazon_link id=”0226458121″ target=”_blank” ]Structure of Scientific Revolutions[/amazon_link] arose from just this sort of cross-fertilization.

[amazon_image id=”0226458121″ link=”true” target=”_blank” size=”medium” ]The Structure of Scientific Revolutions: 50th Anniversary Edition[/amazon_image]

Getting a productive debate going may not be so easy, however, given the mutual suspicion and hostility between (some) external critics and (some) mainstream economists. The latter have perpetrated some appalling examples of arrogance. Lionel Robbins, in [amazon_link id=”0333370392″ target=”_blank” ]the essay[/amazon_link] that defined (mainstream) economics, claimed it was: “A body of generalizations whose substantial accuracy are open to question only by the ignorant or the perverse.” Much more recently, Robert Skidelsky’s description of economics as ‘a branch of logic’ shows that this tradition of disdain for critics is alive and kicking. (Skidelsky seems to hold the mistaken belief that you cannot arrive at erroneous conclusions using logic.)

In the opposite direction, though, external critics perceive a theme (about the need to reduce the size and role of the state) that runs from undergraduate textbooks and teaching, right through to the formulation of public policy. It appears to unify the discipline and all its members around a body of theory that provides politically-convenient support for laissez-faire – despite having a number of serious flaws that have persisted, un-mended, for many decades (such as the lack of any realistic model of how buyers and sellers get to know the ‘true’ price). What is really going on here?

Our critical instinct is to go into even the earliest stages of contact with academic economists eager to trash this set of ideas – totally missing the point that not all economists are tarred with the same brush. If we, the external critics, imply that all economists are engaged in a conspiracy to suppress our criticism, we brand ourselves as ignorant, and thereby lose potential allies within the profession. (I’m using ‘we’ because my home discipline is management – not sure quite where I belong now.)

In reality, there are many senior academics who have long held deep reservations about the power of markets to optimise anything, and do not subscribe to the old easy certainties about laissez-faire. (Curiously, [amazon_link id=”1907994041″ target=”_blank” ]these reservations[/amazon_link] are almost entirely absent from undergraduate teaching and textbooks.) The profession is still deeply-divided, though, and other eminent academics do still adhere to the old certainties. In an article in The Economist, Robert Lucas claimed that the post-2007 crisis should not be taken as evidence of deep-seated flaws in mainstream economics, because the Efficient Market Hypothesis (EMH) showed that such crises were inherently unforeseeable – this despite the considerable body of evidence against the EMH. (There is a summary of this in Robert Shiller’s [amazon_link id=”0691166269″ target=”_blank” ]Irrational Exuberance[/amazon_link].) At the very least, we are able to see when we are entering a period of great potential instability – the case studies of earlier crises in Paul Krugman’s [amazon_link id=”1846142393″ target=”_blank” ]Return of Depression Economics[/amazon_link] identify some interesting indicators.

[amazon_image id=”0691166269″ link=”true” target=”_blank” size=”medium” ]Irrational Exuberance[/amazon_image]   [amazon_image id=”1846142393″ link=”true” target=”_blank” size=”medium” ]The Return of Depression Economics[/amazon_image]

The profession also includes those who studied economics, years or decades back. They were taught that (mainstream) economics is indeed ‘a body of generalizations whose substantial accuracy are open to question only by the ignorant or the perverse’. A lot of my old colleagues in the major international development organizations belong to this group. With few exceptions, they certainly subscribe to the belief that mainstream economics has got it just about right – as do many economic commentators, notably The Times columnist, Daniel Finkelstein. I am thinking particularly of his encomium (14th Dec 2014) on the late Gary Becker. (Becker was probably the most over-confident advocate of extending mainstream economic principles to cover much of human non-market behaviour.)

Finally, there are politicians who want to use the simple messages about the beneficence of market forces to promote an agenda of ‘rolling back the state’ – some from sincere conviction, some in cynical pursuit of personal or factional interests.

Mainstream economics isn’t a single, monolithic body of experts and expertise. Rather than attacking this mirage, we all – meaning internal and external critics alike – should be thinking about a radical review of the mainstream paradigm, and seeking more realistic alternatives. (One thing that my particular school of outsiders can contribute is skills and approaches for managing that process.) That, however, is a much bigger story, one for another day.

Peter blogs as EconomicsEye. Since starting out in the natural sciences, he has worked in project management, and the management of R&D and innovation.

Economics for the curious

Each August there’s a meeting in Lindau of economics (and other) Nobel laureates.* I’ve never attended but have just been looking at the book of essays for young economists written by the participants in the conference, [amazon_link id=”1137383585″ target=”_blank” ]Economics for the Curious[/amazon_link] edited by Robert Solow with Janice Murray. There’s an obviously impressive list of contributors, whose talks cover subjects ranging from natural resource sustainability (Robert Solow) to structural change in the global economy (Mike Spence, who taught me a graduate micro course once upon a time) to the role of transactions costs in the social sciences (Oliver Williamson) and the character of economics (Vernon Smith).

[amazon_image id=”1137383585″ link=”true” target=”_blank” size=”medium” ]Economics for the Curious: Inside the Minds of 12 Nobel Laureates[/amazon_image]

The essays (the ones I’ve read) are very accessible and non-technical. Solow’s essay on applying economic principles to renewable and non-renewable resources is a model of clarity that could be set for undergraduates. Williamson’s essay on transactions cost economics is fascinating. He insists on the importance of interdisciplinarity – I hadn’t known he started out an engineer and came to economics via business. He usefully describes Coase’s famous 1960 paper, The Problem of Social Cost (pdf), the origin of modern institutional economics, as an exercise in reductio ad absurdum – what happens when you push the logic of zero transactions costs to its conclusion? He usefully captures Coase’s stricture against ‘blackboard economics’ by explaining the need for comparing any activity being analysed, not to an abstract ideal of efficiency, but to a realistic alternative. He ends with advice to students to take elective courses in any filed that interests them. “Try it. You may like it.”

I’ll now finish reading the essays, but my impression is that it’s a little book which is perfectly pitched for undergraduates or sixth formers, and is currently only just over £10 on Amazon.

 

 

 

* I know it isn’t a ‘real’ Nobel, ok?

What do economists know?

Emran Mian, who runs the Social Market Foundation (and has written a brilliant novel, [amazon_link id=”1846556260″ target=”_blank” ]The Banker’s Daughter[/amazon_link]), has a terrific essay – Prediction and the Flagpole –  in 3am Magazine about the problem of knowledge in economics – what do we actually know about how the economy works, about causality? As he points out, either the mechanisms are highly contested among economists, or ignored by them. We don’t know very much at all.

There should be no shame in this, because we don’t know much about anything. This is why epistemology is so hard. However, as the article also says, “We live in a peculiarly economics-friendly public sphere.” Yet many economists over-claim their knowledge, especially when it comes to making predictions. Personally, I think economic forecasting is largely a hopeless task except for the limited task of using time series methods to predict a short period ahead. (I was a forecaster for several years, a long time ago, so I know whereof I speak.) Chris Dillow has recently blogged about the nonsense often associated with forecasts – unicorn farming is his term for it. Nate Silver’s [amazon_link id=”0141975652″ target=”_blank” ]The Signal and the Noise[/amazon_link] has a terrific chapter effectively demolishing most macroeconomic forecasts.

After the onset of the financial crisis, there were lots of calls for economists to be humbler. I don’t see a lot of humility, alas. Most f my colleagues have little interest in the philosophical questions, although of course my great hero David Hume was keen on epistemology. One terrific book about what economists can know is John Sutton’s [amazon_link id=”0262692791″ target=”_blank” ]Marshall’s Tendencies: What Can Economists Know?[/amazon_link]. I must read Mary Morgan’s [amazon_link id=”0521176190″ target=”_blank” ]The World in the Model: How Economists Work and Think[/amazon_link], and Nancy Cartwright’s recent [amazon_link id=”0199841624″ target=”_blank” ]Evidence-Based Policy[/amazon_link] – she has also written a lot about the causality question.

[amazon_image id=”0262692791″ link=”true” target=”_blank” size=”medium” ]Marshall’s Tendencies: What Can Economists Know? (Eyskens Lecture) (Gaston Eyskens Lectures)[/amazon_image]  [amazon_image id=”0521176190″ link=”true” target=”_blank” size=”medium” ]The World in the Model: How Economists Work and Think[/amazon_image]  [amazon_image id=”0199841624″ link=”true” target=”_blank” size=”medium” ]Evidence-Based Policy: A Practical Guide to Doing It Better[/amazon_image]

Walter Lipmann, public economist

A new biography, [amazon_link id=”0674368134″ target=”_blank” ]Walter Lippmann: Public Economist[/amazon_link] by Craufurd Goodwin, is a very interesting portrait of someone not all that well known now. I ended it appreciating that Lippmann was a more important figure in early 20th century America than I’d realised, perhaps a Martin Wolf of his day. The mixture of intellectual rigour and status with an ability and urge to communicate with the wider public is relatively rare, and important in modern democracies, with all their political and economic complexities. Lippmann was probably the first ‘public economist’.

I was aware of Lippmann only through his 1920 book [amazon_link id=”0691134804″ target=”_blank” ]Liberty and the News[/amazon_link], which for some random reason sits on my shelves, and [amazon_link id=”1484150295″ target=”_blank” ]Public Opinion[/amazon_link], published in 1922. The biography concentrates instead on his books and columns on economics and political economy, tracing the development of his thought as he watched the Depression and war unfold, and engaged with both Keynes’s and Hayek’s work. Throughout the decades, however, in an era when the old order was dying, Lippmann challenged the attractive certainties of the extremes, observing that ‘free’ markets had never existed, and that collectivism relied on censorship, spying and terror. This search for a way to manage the modern economy, and deliver to voters in democracies the economic well-being or assurance they demanded, while safeguarding liberty, remained his theme throughout, above all in [amazon_link id=”1178812782″ target=”_blank” ]The Good Society[/amazon_link].

Lippmann sounded (in [amazon_link id=”1560005599″ target=”_blank” ]The Method of Freedom[/amazon_link]) rather like a modern behavioural economist: “The classical economists over-estimated the enlightenment which is based on self-interest and the fortitude based on self-reliance. … Imitation, the herd instinct, the contagion of numbers, fashions, moods, rather than enlightened self-interest, have tended to govern the economy.” And elsewhere, he emphasised the importance of institutions, regretting the fact that economists had not combined their powerful analysis with a ‘humanly satisfactory’ social philosophy. Economics needed to show concern not only with liberty, but with a ‘concern always for those who could not cope with modernity,’ as Goodwin puts it.

Lippmann, always interested in education and closely involved in the economics department at Harvard, was unable, though, to resist the tide of increasing specialization, to stop the schism between the humanities and social sciences, or the isolation of economics from politics, philosophy, psychology and history. What a shame.

This is a timely biography. Lippmann’s concern to navigate through the real complexities and uncertainties of a transitional, even revolutionary, economic era while avoiding the appealing, easy answers was admirable. So was his determination to explain to fellow citizens the economic debates of the day. Not surprisingly, I find the idea of a public economist very attractive. As a character, Lippmann seems slightly unappealing – brilliantly successful from his undergraduate days on and wholly plugged in to the establishment, he comes across as rather smug, although this is no doubt partly because of my anachronistic reading of his letters as quoted here. There is also perhaps a bit too much detail in the book for the mildly interested reader, although having said that it is well-written and not at all too long. Lippmann is well worth re-discovering as we continue through our own period of economic and political upheaval, and this book sheds light on what made him an important figure who deserves to be better known.

[amazon_image id=”0674368134″ link=”true” target=”_blank” size=”medium” ]Walter Lippmann: Public Economist[/amazon_image]

[amazon_image id=”1178812782″ link=”true” target=”_blank” size=”medium” ]The Good Society[/amazon_image]  [amazon_image id=”1484150295″ link=”true” target=”_blank” size=”medium” ]Public Opinion[/amazon_image]

Teaching economics

Good news from the land of the soulful science: a number of economics departments – including my own at the University of Manchester – are reviewing their undergraduate curriculum.

As someone who has been involved in the CORE project, which is being piloted in the UK by UCL this academic year, I naturally think it has a lot of appeal. It:

“Begins with ‘the capitalist revolution,’ introducing the student to what the economy is (rather than, as is more common, what economics is, generally depicted as simply the study of markets, or of constrained optimization). Our starting point focuses their attention on a series of pressing problems today – including economic prosperity, environmental challenges and inequality.  And it underlines the fact that the economy is embedded in its social and environmental context. Knowledge that comes from other disciplines – from history, political science, climate science, demography, and psychology – is part of the formation of an economist …. [The concepts included] passed two tests:  are they important in equipping students to address the major economic challenges faced by society today? And can the concepts be used in complementary ways, so that the student learns a unified, connected and multi-faceted way of understanding our economies, including their histories and the varieties of possible future economic systems that we might wish to consider?”

However, there are other alternatives beginning to emerge. Recently I’ve been looking at Peter Dorman’s two volumes, [amazon_link id=”3642374336″ target=”_blank” ]Microeconomics: A Fresh Start[/amazon_link] and [amazon_link id=”3642374409″ target=”_blank” ]Macroeconomics: A Fresh Start[/amazon_link]. In very many ways they are vastly better than many conventional textbooks such as [amazon_link id=”184480870X” target=”_blank” ]Mankiw[/amazon_link]. They refer to the real world and recent events.

The micro volume, for example, starts by discussing economics in the context of intellectual history and also some of the building blocks: the psychology of decision-making, rationality and uncertainty, and the concept of equilibrium. It discusses values and well-being. It then looks at the range of economic  institutions, markets, firms and civil society as well. There is a more conventional section on demand and supply. Then a final chunky section on microeconomic challenges – financial markets, inequality, poverty, ecology. I would be very happy to teach from this.

[amazon_image id=”3642374336″ link=”true” target=”_blank” size=”medium” ]Microeconomics: A Fresh Start (Springer Texts in Business and Economics)[/amazon_image]

I’m less well-placed to comment on the macro volume, except to say it also looks a lot better to me than the alternatives. For example, it starts with measurement of national accounts aggregates and includes institutional issues. It then proceeds by presenting different macro theories or approaches in their historical context – Keynesianism in the 60s and 70s, the turn to free marketeering, the ‘Great Moderation’ and the crisis. This is far more honest than pretending to present a settled body of knowledge.

My gripe – and it’s a big one – is that each volume is just under £50. One of the U of M students recently blogged about the price of textbooks. I don’t blame her for the complaint. No doubt there are other new textbooks on the way but I wonder if any of the publishers will opt to test the price elasticity of demand? The CORE modules are available online for free as a public good, with the effort donated by a large group of academics from around the world. Free is quite a big advantage.