Economics

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Economics as the Third Culture?

Is economics a “third culture” the way Noah Smith suggests it is?

Is it sufficiently different that it deserves its own category apart from the humanities and the sciences?

Who cares?

Well, clearly Smith does. His article is interesting, though, more for what it shows us about the viewpoint of those who are trying to defend it against external claims of failure and/or irrelevance.

He notes that economists can be distinguished from scientists and engineers by the narratives they construct. They are story tellers. Albeit story tellers armed with prodigious amounts of obscure mathematics. Yet story tellers nonetheless. They are dedicated to constructing persuasive accounts of why their particular assumptions about the world can assist society in both understanding and controlling the transactional aspect of everyday intercourse. They seek to explain exchange and all the phenomena that influence it. Some of these phenomena are revered as “forces” or “laws”, thus imbuing them with a quasi-scientific and naturalistic status. Such forces play an exalted role in the stories economists weave. They are the economic equivalent of the ancient gods of Olympus. They punish those who dare defy them and they reward those who bow down in supplication.

It would be difficult to imagine an engineer telling stories. Why would they need to?

When bridges fall down it is either because of wear and tear, or it is because of human fallibility: an engineer can point to an error in the plans.

When markets fail it is because the economic gods work in inscrutable ways and with such deftness that the causes of failure lie hidden deep within the complexity of the economy. It is never because of human fallibility. There are no errors in the plans because the plans are just stories, and like all stories they are a sampling of the depths of human experience. The error must be sourced somewhere in the murkiness of the un-sampled part, in a story yet to be told.

Economists are never wrong because the stories they tell are never complete. They are models. They are simplifications. Of course there is another chapter that covers crises. It’s just that the current story has no crises in it. The plot can’t accommodate a crisis, so it cannot exist.

So economics is a kind of fiction. Mathematical fiction.

I suppose that’s a third culture of sorts.

What caught my eye in particular is this statement half way through Smith’s article:

“The main insight, in my opinion, is that most things in the world have some randomness in them …”

Really?

This is an insight of economics? Randomness?

I must misunderstand somewhat. I thought economics, in its mainstream incarnation at least, treated randomness like a plague. Randomness surely would imply more than a smidgeon of uncertainty, and uncertainty is to be found nowhere in orthodoxy. Indeed mainstream economists go to enormous lengths to constrain their parallel world within various kinds of perfection: rationality, equilibrium, foresight, information and so on. Randomness sits well outside their narrative. At least as I understand it. Then again there are some kinds of fiction I don’t find appealing, so I tend to ignore points that aficionados trumpet loudly.

And even if it were a character in the mainstream story, the claim that it is somehow a unique insight of economists is suspect to say the least. I imagine others might stake a claim. Many a better claim.

He goes on:

“Dealing with randomness has made econ stringer in some ways than traditional sciences …”

So he really believes that economics has dealt with randomness. Presumably by ignoring it. I am missing something. This must be one of those stories with multiple meanings only revealed at the very end. And I haven’t reached the end.

But this I cannot misunderstand:

“Literature describes human behavior, while natural science ignores it. But economists want to control human behavior, and that means the object of their study is as smart and free-willed as the economists themselves”

Gulp. I hope this is a joke.

Whatever it is, the implications are astonishing.

Economists want to “control human behavior”? Maybe that’s because their model of behavior is so laughably naive that none of their narrative makes sense without bending reality to fit it rather than the other way round.

And humans are as “smart and free-willed” as economists? Smart? Let’s not go there. But free-willed? Where, exactly, is the free will in abiding by the laws of the economic gods? The precise determinism of mainstream economics holds its model humans in a vice like grip. They have no choice but to obey the rules. Else they are tossed outside the story. Vagaries are not allowed. Preferences are rigidly enforced, unchanging and eternal they weigh upon the model humans eliminating any vestiges of humanity. Why? Because it makes the math easier and allows the economists to make sure their narratives are as self-consistent and precise as possible.

Self-consistent and precise.

Fiction.

A third culture. Neither humanity nor science.

Perhaps not good enough for either?

 

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More Self-Criticism

And while I am on the subject I see Krugman makes the case that “real economics”, aka supreme belief in market magic, may well not be that real after all. Then he throws this in:

“Yes, much of micro can be derived rigorously from individual maximization plus equilibrium; but why, exactly, does that make it right?”

Well.

In fact it makes it wrong.

Individual maximization is a pipe dream that only exists in the heads of utopian economists. And equilibrium. Have you ever seen one? Seriously? Neither have I.

Add the two together and you have a wonderfully coherent, internally consistent, beautiful system that portrays nothing. It looks good. It is vacuous nonetheless.

To think that good macro has to be built on this vaporware is just awesomely foolish.

Yet, apparently, according to luminaries like Robert Lucas, “good” economics is built precisely on such vapor.

No wonder “real economics” is of little to no value.

Maybe we should try real world economics.

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Self Criticism in Economics

This is a bit of a rant. Please bear with me.

I rarely do this, but here’s a link to one of my favorite economics blogs:

Unlearning Economics:Economists Dissing Economics

The problem with all this self-criticism is that many of the people doing the dissing are responsible for the disarray they are criticizing. A different view is that none of them saw fit to make enough noise to change things.

This may unfair of me.

Notice also that much of this criticism is dated. The wheels have been coming off economics for a long time, yet inertia is sufficient to prevent change.

This may also be unfair of me.

But, ask yourself: where else in our economy could so much analytical ineptitude be tolerated for so long? Where else could repeated failure be fobbed off so easily? Where else could so much fraction, discord, and general incoherence be treated as a “profession”?

If some of the so-called heterodox alternatives to the dominant theories were so compelling surely they would have been more widely accepted. It is not enough to carp about other people’s evident failings – and believe me, as a relative outsider those failings are glaringly evident – because I believe those who complain have a responsibility to build the better alternative.

Instead we are confronted repeatedly by the same old stuff. The same old utopian nonsense, or the same old half complete theories. For sure, around the fringes there are signs of progress, but mostly they, too, suffer from incompleteness, over reliance on formalism, and, unfortunately too often, a highly naive interpretation of reality.

There is a mass of work going on within economics. Well intentioned work. Brilliant work no doubt. But it isn’t advancing us. It is not penetrating the fog of complexity or uncertainty that real world people working in the economy take for granted as the basic condition they must deal with.

I am talking about the basic stuff outsiders would consider to be economics.

There is an issue here we need to be clear about: lots of economists don’t work on the economy. They work in obscure sub-fields of economics, so they think of themselves as immune to the criticism, post-crisis, that economics is a failed enterprise. They regard themselves as making progress, albeit in largely irrelevant and purely academic domains that will have only marginal – if that – impact on society. These people are not economists in any popular or vernacular definition of the word. They are technicians adept at analysis. They could be mathematicians just as easily. Or computing theorists. Or quasi-physicists. Or whatever. By and large they’re good with numbers. That’s it. As if that’s economics.

The problem is that at the root of their knowledge sits the same profoundly unreal and naive vision of humanity that infects and thus incapacitates mainstream economics. They propagate it unwittingly. They tolerate it.

It is one thing to stylize, synthesize, or otherwise simplify in order to abstract from reality. It is entirely another matter to obliterate reality along the way. Modern economics – most of it – just isn’t about the economy. It is self-perpetuating and self-regarding. It values itself above its value to society. And when confronted by the complex uncertainties of the real world it sets about the performative task of altering reality to fit its theories.

Economics is about bending the world to fit the theory rather than the other way around.

How else can you explain the profoundly anti-democractic nature of new classical thought?

Anyway, enough of my complaining. It is disheartening to come across lists like that at Unlearning Economics.

I hope you all can prove me wrong about economics.

I really do.

 

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Is Economic Orthodoxy Anti-Democracy?

Yes it is.

The explanation is found in the genesis of classical economics and then in its idealization of the marketplace.

At its onset the modern neo-liberal project was a search for a way of organizing civil society without that organization being imposed in what had hitherto been an overt political, that is power relationship, sense. Thus the literature in the late 1700’s is brimming with applause for what we would now call the market as a method of coordination. In contemporary thinking we seem to forget that the market back then was seen as a supreme organizing principle for all social activity since the then burgeoning economy was the major issue calling for analysis. The market was posited as an alternative to the prior traditional political problem solution to allocation because it allowed the emerging commercial class to locate itself within a social structure facing great stress. The older regime had no space for commerce as it was being redefined – starting with a redefinition of the word itself. Older societies were based on long established, hierarchical, and unvarying governance of all aspects of life, including what we now describe as economic activity. That governance was centered in traditional sources of power. It was thus deeply political, although people at that time would not have referred to it in that way.

The emancipation of society from religion, and the traditions surrounding it, opened the door for the emergence of novelty throughout society. For that novelty to blossom into a new form of society, and, crucially, for industry to replace agriculture in the core of human transactional relationships, the power relations in society had to be re-arranged. A new and powerful class had to accommodated. Yet that class was diffuse and self-reliant. It was assertive and seething under the impress of the older and overtly political organizing principle.

It thus leapt at Adam Smith’s revolutionary idea that society could self-organize. The market became the iconic anti-heirarchy. Organization could be achieved without organization. The paradoxical solution to overthrowing political domination of commerce was to decentralize decision making, not partially, but radically. Everyone became a decision maker. Everyone became a player. Politics was eliminated because it was infused everywhere.

Thomas Paine called this process the substitution of government based upon power by societies based upon the harmonization of personal interests. This is the explicit core of the entire subsequent liberal enterprise. It is utopian. It regards it as possible that society can effect relations harmoniously, without conflict, and objectively rather than subjectively. Smith’s market achieves this dream. Society is magically woven together without the oppression of politics. The market becomes the conduit through which human relationships are arranged. The abstract of the market replaces the concrete of the political. Inter-personal relationships become governed by the impersonal hidden hand. They are thus drained of potential strife, after all the mechanism called a price is established without subjective intervention. It emerges naturally from within the body of a society interacting according to self-interest. There is no government to overthrow, no power to object to, and no political repression. Harmonious, wonderful, and magical the market provides a method of social coordination without the egregious failings of traditional politics.

Thus in our time Milton Friedman could write:

“Adam Smith’s flash of genius was that the prices that emerged from voluntary transactions between buyers and sellers – for short, in a free market – could coordinate the activity of millions of people, each seeking his own interest, in such a way as to make everyone better off … The price system is the mechanism that fulfills this task without central direction, without requiring people to speak to one another or to like one another … Economic order can emerge as the unintended consequence of the actions of many people, each seeking his own interest. The price system works so well, so efficiently, that we are not aware of it most of the time.”

Utopia indeed.

Friedman was living in the 1700’s when he wrote that.

Like most of the original liberal vision articulated fresh after emancipation from tradition, the notion of harmonious self-organization without politics fell afoul of subsequent history. In particular it fell afoul of capitalism. In other words its own logic doomed it. The absence of power relationships inside the magic of a marketplace is an illusion. They persist, if at first only in a highly diffuse manner. The accretion of wealth and its persistence through time undermined the utopia of a pure Smithian vision. Friedman ought to have realized this, but he was so caught up by the purity and glare of the magic that he continued to proselytize naively long after power had debased the original idea.

And it was in opposition to that debasement that societies throughout the industrial world established democracies. In other words societies re-introduced politics as an organizing principle to offset the failings of the market. Democratic governance is overtly political. It is a method of organizing power relationships. It is thus, and also overtly, a constraint on freedom. By this I mean that the utopian freedom of the 1700’s, which remains the core vision of orthodox economic theory, was self-defeating because it failed to take into account the subsequent distribution of wealth. That distribution undermines the price mechanism by concentrating power in the hands of successful capitalists. And, since the market is the central source of social cohesion in the orthodox model, that places capitalists at the epicenter of power. Politics is thus no longer diffused. Everyone is not equal, but traditional pre-industrial style imbalances resurge. That resurgence engenders a response which is to curtail the freedom of capitalists by balancing their interests with those of other groups acting as groups not as individuals.

In this way democracy is a return to the medieval politics of conflicting group interests, now re-articulated in modern terms, and the overthrow of the 1700’s vision of individual interests and harmonious coordination. This reversion is what allowed Marx to refer to traditional medieval governance as the “democracy of unfreedom”.

It is this narrative that leads me to argue that orthodox economics is inherently anti-democracy.

It is also what leads modern market advocates to decry the study of distribution of income and wealth as irrelevant. To them it is. But to a society where politics is no longer expunged, and where the original utopian vision of harmonious coordination has broken down because of the resurgence of power relationships based upon group interests, distribution is crucial. It is paramount. Distribution in this post-utopia is the basis of power. The market manifestly did not usurp politics as the primary coordinating principle of society. The price system does not work as efficiently as Friedman and his ilk imagined. This is not because it is falsely conceived, or improperly articulated. It is because it fails in the presence of humans. It is a pipe dream in the context of human experience. It is in conflict with reality.

So when orthodox economists seek to impose their vision on society, when they advocate the elimination of what they see as barriers to the efficient working of the market, they are seeking to convert concrete realities into illusory, magical and unattainable abstractions. To persist in this endeavor despite the empirical counterpoint is to defy the democratic urge to offset the concentration of power within the market. A concentration which, by its very existence, denies the validity of orthodoxy.

But they persist. They write articles objecting to studies of inequality. They declare inequality irrelevant.

They thus declare their opposition to democracy. To them it is democracy that is irrelevant. To them the market is sufficient governance. It will mediate and resolve everything. Democracy, by recognizing reality rather than pipe dreams, albeit clever pipe dreams, must thus be opposed.

Yes orthodox economists are anti-democracy.

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Unsound on Equality

In a recent speech I gave on inequality, I described the relevance of economics in a series of quotes thusly:

“Political economy you think is an enquiry into the nature and causes of wealth – I think it should rather be called an enquiry into the laws which determine the division of the produce of industry amongst the classes who concur in its formation” ~ Ricardo to Malthus correspondence, quoted in Sraffa, 1951

“The real scientific study of the distribution of wealth has, we must confess, scarcely yet begun. The conventional academic study of the so-called theory of distribution into rent, interest, wages, and profit is only remotely related to the subject. This subject, the causes and cures for the actual distribution of capital and income among real persons, is one of the many now in need of our best efforts as scientific students of society” ~ Irving Fisher, 1919

“Does Inequality in the distribution of income increase or decrease in the course of a country’s economic growth? What factors determine the secular level and trends of income inequalities? … These are broad questions in a field of study that has been plagued by looseness in definitions, unusual scarcity of data, and pressures of strongly held opinions.” ~ Kuznets, 1955

“I am wandering away from my usual concerns briefly to discuss an even more nagging and pervasive tradeoff, that between inequality and efficiency. It is in my view, our biggest socioeconomic tradeoff, and it plagues us in dozens of dimensions of social policy.” ~ Okun, 1975

“Of the tendencies that are harmful to sound economics, the most seductive, and my opinion the most poisonous, is to focus on questions of distribution … The potential for improving the lives of poor people by finding different ways of distributing current production is nothing [italics in original] compared to the apparent limitless potential of increasing production.” ~ Lucas, 2004

“Equality lacks relevance if the poor are growing richer.” McCloskey, 2014

The journey from being actively concerned, through a somewhat guilty admission of a lack of progress, to a stab at a general idea, thence to the notion of inequality as a cost of seeking growth, only to arrive, finally, at a patronizing dismissal of the entire topic is an arc of embarrassing failure.

It is an arc of abandonment of reality.

When we arrive in the world as seen through the eyes of Lucas and his students we realize that dogma has swept realism from the field. Concern for people has been tossed lightly overboard. Concern for the consequences of inequality are dismissed haughtily as concerns of those not interested in doing sound economics. Notice that word: “sound”. This is neat trick Lucas and his gang constantly play. The implication is brazen and absurd in equal measure. Only they actually do sound economics. Others do unsound economics and thus deserve no credit or attention. Lucas does not wear his arrogance well. Nor does he hide his contempt for society. All that matters is purity. Ideological and theoretic purity. Damn the consequences. And damn reality if it fails to conform.

A wonderful aspect of this commitment is that it allows its high priests to ignore the effects policies based on its tenets may have beyond the extraordinary narrow base upon which it all depends. Market magic is all that matters. And the supposed laws Lucas and his ilk have divined within market magic are applicable under all circumstances and are universally correct.

McCloskey bravely tries to cobble humanity onto the tail end of the Lucasian monster. Her solution to the question of growth is that answer lies outside of market magic and in the ethics of greed. This is just a backdoor way of reintroducing the same magic under a different moniker. The economics she describes undergirding the change in ethics is still Lucasian. It is supply side driven. It is still magic. At least it is dignified magic.

The Lucasian project simply tells us that since people are better off than in the past they ought to be happy. There is no need to right the wrongs of the past, all we need to do is replicate them at a higher level of prosperity. This is not “let them eat cake”, it is “let them eat a bigger cake, they ought be grateful either way”.

So we have learned nothing in two hundred years. Economics cannot explain why we are better off. It just contents itself with studying the allocation of a larger pie. Growth remains a mystery to be explained as a residual or simply as a pot load of better technology that appeared from somewhere and may, or may not, be part of the subject matter economists need to study. That the development of technology was not central to theories of growth from the outset is astonishing. That its eventual inclusion is presented as an intellectual triumph is distressing. Or growth is simply an adjunct of a magical twist in ethics whereupon greed became something we could dignify, and ought accept with humility and without question.

I wonder sometimes whether economists ever talk with anyone who is actually doing production. Or is that contact with reality too much? Would it stress the black box too much?

The almost painful ways in which economists avoid the complexities of real economies and instead jump straight to absurd simplifications is difficult to observe.

It is more difficult to stomach the outcome of this avoidance.

Equality is simply not important. Harrumph. Why not? Because its silly to discuss it when we all have more stuff than our ancestors. We, poor little dears, ought to sit back contentedly and let the titans of industry churn out the goodies we want, and accept our lot gratefully. We ought not worry our little minds about grown up topics like distribution of wealth and income. After all whatever the market decides in its mysterious and magical way is perfection itself. Tinkering with it can only undermine the great machine.  The market will decide what’s fair and what’s unfair. That determination is not for humans to meddle with. We ought not try to play something we don’t understand. Apparently there are humans in the Lucasian marketplace.

Or is it that we ought not play with something that only Lucas and his disciples understand? They’ve been to the mountain. They have the tablets.

Us? Not so much.

We ask naughty questions.

We are unsound.

Maybe. But absurd we are not.

 

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