Tag Archives: economics

Economics and public policy

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I was mulling over the exchange at the Festival of Economics described in yesterday’s post, between those saying economics had little to contribute to the debate about public services because it is simplistic and reductionist, and the economists pointing out that economics as applied to this area actually addresses the critics’ claims. Needless to say, I’m on the side of the economists, and indeed wrote a whole book ([amazon_link id=”0691143161″ target=”_blank” ]The Soulful Science[/amazon_link]) pointing out all the richness and sophistication of modern applied economics.

To check my views, I looked through Lee Friedman’s [amazon_link id=”0691089345″ target=”_blank” ]The Microeconomics of Public Policy Analysis[/amazon_link], a recent textbook in this field. The issue of equity is brought in by Chapter 3 (after an introductory/overview chapter and one on cost-benefit principles). Distributional issues feature strongly throughout. Profit versus non-profit behaviour is discussed at length. The interaction of markets and policy is thoroughly covered and a whole section discusses the pervasive problems of asymmetric information and externalities. The book is full of examples (all American) illustrating the unavoidable trade-offs in policy decisions.

[amazon_image id=”0691089345″ link=”true” target=”_blank” size=”medium” ]The Microeconomics of Public Policy Analysis[/amazon_image]

Yet of course the critics have a point. Because although economists are doing all this subtle work, the policy debate still draws on the caricature version of the economic debate, the ‘markets good, government bad’ or vice versa. This is partly the usual problem of the people in charge having learned their economics a long time ago. It’s also clear that economists should redouble their efforts to communicate their work. But I wonder if there are other barriers to the policy world embracing the subtler and evidence-based work that is taking place now in economic research into public services?

Celebrating economics

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The 2nd Festival of Economics in Bristol, which took place over Thursday to Saturday, was a great success. There were many more people attending than in the 1st year, and the quality of speakers, questions and debate was fantastic. The aim of the Festival is to get economists and members of the public in discussion about profoundly important trends and policy questions – obviously, the appetite to do so is quite large.

The Arnolfini Bookshop serves the Festival with an outpost selling books by various speakers. We also launched the Perspectives series there this time, with two of the first group of authors, Julia Unwin and Bridget Rosewell in attendance.

Arnolfini economics

One of the liveliest parts of the day was a vigorous debate between David Walker (a sociologist by training, @Exauditor77 on Twitter) and economists Paul Johnson of the IFS and Sarah Smith of Bristol University’s CMPO. It even got the audience heckling, on both sides. The debate is on Twitter under #economicsfest. Briefly, Walker said economics has nothing to offer the debate on public service reform because of information asymmetry and spillovers. Sarah Smith pointed out that the economics of public services recognises exactly those features, but agreed that economics needs to pay more attention to the transactions costs and monitoring of outsourcing. Paul Johnson argued that the policy debate relies too much on a simplistic Econ 101 version of economics, and all the economists concluded that people need to learn much more economics…

diane1859
Do we economists really make tendentious a priori assumptions about health competition? @Exauditor77 makes the accusation… #economicsfest
23/11/2013 10:42

Point, counterpoint

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I’ve been travelling a lot this week and have read quite a lot of [amazon_link id=”0691159904″ target=”_blank” ]The Essential Hirschman[/amazon_link], a collection of Albert Hirschman’s essays – no doubt the success of Jeremy Adelman’s terrific biography, [amazon_link id=”0691155674″ target=”_blank” ]Worldly Philosopher,[/amazon_link] has stimulated interest in his work.

[amazon_image id=”0691159904″ link=”true” target=”_blank” size=”medium” ]The Essential Hirschman[/amazon_image]

I’ll review it soon, but meanwhile was amused to find this observation in an essay on Arthur Lewis:

“Whereas in the natural or medical sciences Nobel prizes are often shared by two persons who have collaborated in or deserve joint credit for a given scientific advance, in economics the prize is often split between one person who has helped develop a certain thesis and another who has laboured mightily to prove it wrong.”

This week’s Nobel for Fama, Shiller and Hansen actually doesn’t fall into this category as the citation makes clear (and also this excellent Crooked Timber post http://crookedtimber.org/2013/10/15/sveriges-riksbank-prize-actually-blah-blah-blah/) – it is for the empirical of studying asset prices. Still, the efficient versus irrational markets notion has taken hold and would fit Hirschman’s observation.

Integration of the social sciences

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Yesterday I quoted the 1827 UCL prospectus definition of economics, with its emphasis on “accurate observation and precise language,” and capsule definition of ‘the science of political economy’ as, “the production, distribution and consumption of wealth, or the outward things obtained by labour, and needed or desired by man.”

I was mulling over the difference between this and Lionel Robbins’ famous 1932 definition of economics (in [amazon_link id=”B002ZZ0U8A” target=”_blank” ]An Essay on the Nature and Significance of Economic Science[/amazon_link]): “The science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.” The greater abstraction compared with the ‘political economy’ of a century earlier is all too apparent.

In his 1948 Newmarch Lectures, [amazon_link id=”1107673860″ target=”_blank” ]The Role of Measurement in Economics[/amazon_link], Richard Stone added this gloss to the Robbins definition:

“While many situations in actual life have an economic aspect, few if any can be analysed wholly in economic terms. Taken literally, however, it would bring the applied economist practically to a full stop since he cannot in general estimate the importance of economic factors unless he is prepared to make assumptions about…certain non-economic factors, such as changes in tastes. In fact he can frequently do this for himself in a rough and ready way, although undoubtedly it would be a gain if he could fall back on other branches of the social sciences for help in such matters. The moral of Robbins’ definition is that in applied work much more integration of the social sciences is needed.”

Hear, hear!

The science of political economy

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My thanks to Professor Ian Preston of University College London for the earliest definition (in England) of the subject of economics – it’s from the 1827  Statement by the Council of the University of London Explanatory of the Nature and Objects of the Institution:

The object of the science of Political Economy is to ascertain the laws which regulate the production, distribution and consumption of wealth, or the outward things obtained by labour, and needed or desired by man. It is now too justly valued to require any other remark, than the occasional difficulty of applying its principles, and the differences of opinion to which that difficulty has given rise, form new reasons for the diligent cultivation of a science which is so indispensable to the well-being of communities, and of which, as it depends wholly on facts, all the perplexities must finally be removed by accurate observation and precise language.

The wonderfully Victorian optimism contrasts with Nassim Taleb’s disdain for economists, which bellows from every other page of [amazon_link id=”0141038225″ target=”_blank” ]Antifragile[/amazon_link]. I’m rather enjoying it so far, but he has a very low opinion of economists, especially those of us who are Harvard-trained (he always refers to it as ‘Stalin-Harvard’). He has it in for nail polish too, and as I occasionally wear it, that’s another strike against me. However, he does like Ariel Rubinstein’s [amazon_link id=”1906924775″ target=”_blank” ]Economic Fables[/amazon_link], an excellent book (and winner of the 2012 Enlightened Economist Prize).

[amazon_image id=”0141038225″ link=”true” target=”_blank” size=”medium” ]Antifragile: Things that Gain from Disorder[/amazon_image]

I met Taleb once –  it was in late 2001 at the launch in London of my book [amazon_link id=”1587991454″ target=”_blank” ]Paradoxes of Prosperity,[/amazon_link] around the same time as [amazon_link id=”0141031484″ target=”_blank” ]Fooled by Randomness[/amazon_link] was published and about to make him massively famous. He had shaved his beard and was travelling as ‘Nicholas’ not ‘Nassim’ at the time, I recall him telling me. He was charming and polite, far from the aggressive and slightly deranged – although hugely interesting – persona that comes across in his books. [amazon_link id=”0141034599″ target=”_blank” ]The Black Swan[/amazon_link] and [amazon_link id=”0141031484″ target=”_blank” ]Fooled by Randomness[/amazon_link] are both great reads containing much sense, so I’m looking forward to the rest of [amazon_link id=”0141038225″ target=”_blank” ]Antifragile[/amazon_link]. And I don’t believe economics to be wholly incompatible with Taleb’s worldview – just look at that 1827 definition.