Power and economics

My esteemed colleague Adam Ozanne has written a very interesting, short book on the strange absence of the concept of power from mainstream modern economics. The book, Power and Neoclassical Economics, argues that the fact that economics ignores power in social relations has also affected other social sciences, especially political science, as they have adopted techniques and approaches used in economics.

What explains the lacuna? Adam dates it to, first, the marginalist turn in economics in the 1870s, which started the process of abstracting from the particulars of reality into formalism; and then to the ordinalism of the 1930s and Lionel Robbins’ insistence that ‘positive’ and ‘normative’ economics could be separated. The new welfare economics of the 1950s finished the job. Indeed, Arrow’s famous impossibility theorem seemed to conclude that we can’t say anything practical about social choice. As the book puts it: “It must seem strange to non-economists that economic and social choice theorists have dug themselves into such a deep hole (though a very tidy, immaculately constructed hole) that they cannot even distinguish between rich and poor, but that appears to be the case.”

However, as Adam points out, an alternative interpretation of Arrow is that the actual social ordering that emerges is a function of the exercise of power (and in a way Sen has made the same point in saying other kinds of information apart from individual utilities can enter the story). The book goes on to argue that the fact that mainstream economics has nothing to say about the distribution of income and wealth is an important part of the explanation for cynicism about the subject – both among the general public and students like our university’s active and enthusiastic Post-Crash Economic Society.

The final chapters of the book discuss how power might be incorporated into economics. It notes that there are signs of stirrings in the ‘New Political Economy’ of economists such as Tim Besley and Torsten Persson and the institutional economics of others such as Daron Acemoglu and James Robinson. Adam suggests an interesting definition of power in economics as an analogy with force in physics, a dynamic that moves the social outcome in the direction of specific groups. He reinterprets classic social welfare functions as ‘political economy functions’ in a way that means they can be used in conventional general equilibrium approaches. His approach can be incorporated into co-operative game theory, a bit of the toolkit economists should feel comfortable with.

The book concludes: “Most economists are in denial about the relevance of power to economics and their own ability to fully address, let alone answer, the For Whom question so long as they neglect power. This is reflected in the textbooks they write and the teaching they offer students, and has not changed even though the sub-prime and eurozone crises of recent years provide clear evidence of the failure of many of their models, in particular dynamic stochastic general equilibrium (DSGE) models. ….. [T]here are grounds for believing that students and the wider public are increasingly disenchanted by what is on offer.” He continues that the normative and the positive need to be distinguished but that economists cannot and should not ignore the former.

I very much liked the book – ie. warmly agree with the general argument. Surely one of the longer-term outcomes of the crisis will be – must be – to turn economics back to political economy. I’ll be thinking more about the specific means of incorporating power in economics that the book suggests; it certainly looks promising.

My one (quite major) reservation about this book is its price (currently £34.45 on Amazon). The publicist explained to me that it’s a series intended to be read as e-books, but the Kindle price is still £30, and this for a 110 page book. Piketty’s 700-page Capital in the 21st Century is less than £20 in hardback! So come on Palgrave, do your bit for economics by reducing the price and testing the elasticity of demand. Meanwhile, everyone will have to order it from the library.

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Think yourself lucky

Robert Frank’s new book Success and Luck: Good Fortune and the Myth of Meritocracy is a nice, brief overview of why luck plays such a big role in an individual’s economic success (or otherwise).

This very readable book canters through some of the key evidence on how economic success depends on chance, amplified by phenomena such as winner take all markets, and by policy. Mainly, though, it is another pitch for Frank’s favourite policy prescription of a progressive consumption tax, something he’s been advocating since The Darwin Economy, Luxury Fever and possibly before. As in those books, he relies here on the argument that much consumption consists of positional spending and the ‘arms races’ need to be limited by policy intervention.

I’m not persuaded about the consumption tax idea, because when you ask policymakers to select luxury goods will probably choose something that might be a luxury now but will become a useful mass market product. Remember Norman Lamont in 1991 taxing mobile phones as yuppie status symbols – which indeed they were at the time. (“I turn now to what I regard as one of the greatest scourges of modern life. I refer to the mobile telephone. I propose to bring the benefit of car phones into income tax and to simplify the tax treatment of mobile phones by introducing a standard charge on the private use of such phones provided by an employer. Tax will be paid of £200 for each phone for 1991-92. I hope that, as a result of this measure, restaurants will be quieter and the roads will be safer.” Budget speech 19 March 1991.) One could be on safer ground with, say, gold leaf covered sports cars, but even so my preference is for progressive income and especially property taxes.

Still, the reminder about the important role of luck is welcome, although it is surely neither wholly necessary nor sufficient for economic success. The most important conclusion to my mind is the negative one that people who are poor are most likely unlucky, whether that be in terms of their parents’ income and status or the quality of their school and neighbourhood, and poverty or unemployment can’t be blamed on laziness. As Julia Unwin pointed out so eloquently in Why Fight Poverty?, we often make unjustified moral judgements about poor people out of fear; we need to recognise the bad hand life has dealt them.

Coase, cars, cities

Alerted to it by Peter Sinclair, this week I read Ezra Mishan’s 1967 (and frequently reprinted up to 1993) book The Costs of Economic Growth. It’s a short, polemical book, and the overwhelming impression you get is that the author was a grumpy chap not at all happy about modern life. Especially in cities. Too much noise, too much dirt, too many people, too much traffic, above all too much traffic. I’m not entirely sure I’d want to have been seated next to him at dinner.

Still, there’s a lot to like in the book. It has some excellent sections on the Coase theorem; on its non-applicability in many situations of environmental externalities because the transactions costs of negotiation are so large; and of the way the legal framework, in defining the status quo, shapes the outcome. If the law does not protect the interest of inhabitants in clean air, polluters will have no incentive or need to negotiate. Mishan in fact calls for general amenity rights to be enacted in law, rather radical but think how much difference it would have made to pollution and emissions since the 1960s. He also wants private vehicles banned from city and town centres, which also seems a radical but basiclly good idea; as he points out, transport analysts too often think their job is to get the traffic moving, when it ought to be to get people moving.

He also points out the importance of the initial distribution of income: “The wealthier the party, the more likely it is that his, or its, favoured outcome will be the optimal outcome.” The reason is that relative wealth will affect the parties’ judgements about what they are willing to accept/pay in a negotiation. Generally, the book is clear – as economists often are not – that an evaluation of social welfare is not possible without taking initial distribution into account. The level and distribution of income are not separable. I might need to go on to read Mishan’s Welfare Economics.

A little bit of his dyspepsia is reserved for the way evaluations of policy only take account of what can be measured even if it is clear that effects that cannot be measured are nevertheless very important. He would like to “arrest the mass flight from reality into statistics,” he writes. He decries ‘growthmania’, “the fact that the fascination with index economics detracts attention from the broader aims of economic policy.” There’s certainly something in this, and indeed I increasingly think economists have to do much better at measuring the size of externalities rather than shrugging the collective shoulders. But, unlike Mishan, I’m for sustainable growth, not no growth.

Mishan died aged 96 in 2014. I’m glad to have filled a gap in my knowledge.

Managing assets well is better than managing them badly

There is a lot I liked in Stewart Lansley’s new book, A Sharing Economy – not least that it’s one of another new series of concise, policy-relevant series, this time Policy Press Shorts. There are now several of these, a welcome publishing innovation that I like so much I’ve joined in with the Perspectives series. (Just out – our Bad Habits, Hard Choices by David Fell and A Better Politics by Danny Dorling.)

A Sharing Economy is not about ‘the sharing economy’, rather confusingly, but instead is an argument for an idea I like a lot, namely ‘social wealth funds’. As the book points out, many other countries have versions of these, ranging from Norway’s fund into which past governments invested its oil revenues, to a number of Asian sovereign wealth funds, to examples in other European countries such as Austria and Finland. The OECD has established guidelines for the better management of state assets, and a recent book by Dag Detter and Stefan Folster, The Public Wealth of Nations, have pointed out the huge opportunity for increasing returns by managing public assets consciously as a portfolio with appropriate governance.

The idea should be a no-brainer for governments. The time horizon of politics in the UK (and some other countries) has become ever more short term, however, so any trade off between present and future has become nearly impossible. There is ideology, or perhaps cargo-cultism, in it too: is there an economist who does not think it bananas that the government is failing to borrow at such low interest rates to invest in key infrastructure? Yet the combination of a focus on total (current and capital) spending combined, plus the belief the public sector should own as little as possible as an article of faith, make it unlikely the present government will explore the idea of managing public assets efficiently with a view to longer term returns. Yet how mad is it that we have no consensus that it is better to manage public assets well than to manage them badly?

The book suggests a number of possible sources of funds for a social wealth fund, and a number of possible structures, of varying radicalism. Some versions are not radical at all; countries like Austria and Singapore are after all not hot beds of anti-capitalism. It also suggests the steps needed to move toward implementation.

An additional chapter advocates a citizen income or basic income, which fits into an overall framing of the argument for a social wealth fund as a means to address inequality. The arguments from common sense appeal more to me, as I’d rather tackle inequality more directly (eg by legislating if necessary against the corporate governance that has created boardroom excess, by suitable property taxation etc). The idea of a basic income has re-emerged with every wave of anxiety about automation destroying jobs, but there are good counter-arguments – Emran Mian of the SMF covers them here.

But the case the book makes for the nation managing its assets properly and with a view to financial and social sustainability is very welcome.

The Great Escape

I’m very late to reading Angus Deaton’s excellent The Great Escape: health, wealth and the origins of inequality. There is lots to like about this book. It’s a clear and comprehensive summary of the state of knowledge about the history and present of two key dimensions of human well-being on earth. Even for economists who’re pretty familiar with the data and research, there are insights from the way Deaton sets out the evidence here. There were plenty of trends in the statistics I hadn’t known about before reading the book – one example is the recent increase in dangerous and deadly behaviour by young people (especially men) aged 15-34 in recent years compared with 70 years ago. (I suppose life presented enough external dangers then.)

I particularly liked the care he lavishes on the statistics – the sources of data, the conceptual problems, the uncertainties – all done in a way the general reader can understand (although it does make for some quite dense sections). As Deaton notes, the way statistics are defined and collected determine how policy problems are defined and addressed: they “are part of the apparatus that allows what political scientist James Scott memorably called ‘seeing like a state‘.

The book is also strong on the social and political context for the spread of ideas that improve health and wealth. As Deaton writes, “Diffusion of ideas and their practical implementation take time because they often require people to change the way they live.” In particular collective actions – affecting public health or education – are inherently political.

And then the new facts: did you know Louis Pasteur invented Marmite (and then licensed it to a British brewer?) Fabulous addition to the shiny nuggets of knowledge.

UPDATE: On the Marmite issue – Deaton’s Pasteur claim was challenged on Twitter:

MikeBenchCapon
@diane1859 Louis Pasteur invented Marmite? Wikipedia says it was some other guy: https://t.co/uD9JZyCT9d https://t.co/hs7x6S8oXx
06/04/2016 10:15

MikeBenchCapon
@diane1859 I’ve looked into this a bit more and I think I’m on Team Von Liebig. https://t.co/kw5BwP1DJa https://t.co/6Orq0mAOQf
06/04/2016 10:48