economic theory

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Notes to Myself

First.

With respect to my summer reading.

I have always been fascinated by information. Its role in the economy; its nature; and its effect on our institutions. Equally I am usually horrified by the abuse information gets in economic theory. To me asymmetries of information are the reason economies exist. They are the cause of need, of exchange, and, at a more pragmatic level of profit. Thus creating, protecting, and maintain asymmetries of information are the lifeblood of business. Which makes most microeconomics a mockery of reality. Especially any micro that presumes information to be either freely or equably available.

You cannot understand an economy without first understanding information.

But not information in the sense of physics so much as information in the sense of biology. Evolution, the origins of life, the subsequent trajectory of everything since that origin are all the story of information traveling through time. We ourselves, and hence everything we have created including economies, are manifestations of that process.

In which regard I want to note the following quote:

“Genomes do not predict the future but recall the past: they reflect the exigencies of history” – Nick Lane, “What is Life?” p. 23

Of course my thoughts went here:

“Economies do not predict the future but recall the past: they reflect the exigencies of history”

How true. The information that is encoded in today’s economy contains the instructions for tomorrow’s. But the exact instantiation of that code is subject to the vagaries of the environment, of error, of emergent novelty, and of many other forces that make that instantiation unique.

In such a context the traditional subjects of economic theory, even the so-called forces of supply and demand, are secondary causes of what will appear as tomorrow’s economy. The primary cause is the interaction of the code and its environment as modified, but not superseded by, those secondary causes.

To understand the code and its travel through time is to understand an economy. Perhaps economics is only part of that overall understanding.

Second:

With respect to an upcoming speech. Two comments I have made – to friends – recently:

“The challenges of the future are how to make growth compatible with environmental safety, how to return to an equable (fair) society, how to reduce class privilege, how to balance social change with our historical legacy, and how to re-capture a sense of security.”

“Meanwhile, one point I want to make clear: I think economic security is essential if society is to navigate through social upheaval safely. Your example of the 1960’s is a good one. Economic security broke down in the 1970’s [mainly due to resource cost inflation, i.e. oil] and produced an extraordinarily conservative reaction manifested by Reagan and then Clinton both abandoning the platform of the New Deal. We are stuck in the economic mire as a result – a proper Keynesian reaction to 2008 would have moved us markedly forward from where we are now.

In other words the intellectual reaction to the 1970’s was an error now so well entrenched throughout our elite thought – and hence policy making – that we cannot break free and recapture security until the elite itself is overturned. And, with respect to your favorite social phenomenon, our cultural elite is also culpable: it is either cynically out to exploit society for personal enrichment, stuck re-cycling out of date leftist critiques, or deeply engrossed in important but yet marginal issues – issues that leave the majority out.

If, for instance, you want a colonial, holocaust, or slave-owning history to be truly written into a nation’s textbooks and its self-knowledge, then you cannot lambast today’s generation as if they caused the problem. They manifestly did not. They weren’t present. Blame, revenge, the call for reparations and so on merely create resentment amongst the very group you want to educate. They create a barrier not an entry way. Look at the deterioration of race relations in the US. It is appalling. Our textbooks refuse to include the real history. Our children grow up ignorant. The loss of economic opportunity aggravates base feelings. So the combination of ignorance and insecurity ends up making matters worse.

A healthy economy, one where opportunity is both real and abundant, where education is available and rewarded, where privilege is reduced to a minimum, where prosperity is fairly shared by all involved in creating it, and where the weak, young, sick, elderly and poor are not subjected to puritanical abuse and thus abandoned, supports a society capable of adapting to its history and of writing a better future.

The great social and economic thinkers of the past were reflecting on the passage of society from its agricultural base to a newer and what seemed disorienting industrial base. Those ideas need to be adapted or replaced as we move from an industrial base into what appears to be an experiential or service oriented base.

It is exciting to try to contribute to that process.”

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Partying Like It’s 1848

This is not a time to dwell on the inconsistencies and even contradictions of the recent uprising of populism in the western world. Treat it as a fact. It just is. For there can be no mistaking the trend: people, large numbers of people, in a large swathe of Europe and America really are unhappy with their lot in life. Really unhappy. Fully 52% of Republican supporters of Donald Trump tell pollsters that they are angry with the way the country is going. Not just unhappy or disappointed, but angry. Anger leads to really bad political decision making. It is not a constituent of reasoned argument. It leads too quickly to rash thought and even to hatred.

One theme that emerges from this populist moment is the identification of immigration as a source of concern. No, not just concern, but of deep unease. People in both the UK and the US can be heard demanding that they “get their country back”. Leaders in both nations have lamentably failed to identify the importance of immigration as a lightening rod for malaise. Nor have they reacted with anything sensible as policy.

Here in America the reason most often given for the failure to deal with immigration is the gridlock in Washington. It is impossible to begin a conversation about immigration policy because the pre-existing political positions are so well laid out and well established that any talk leads immediately to a conformation of gridlock. So stasis abounds and people get more and more impatient.

The same goes for economic policy. This is what interests me most of course. The failure of economics is breath-taking. The failure of politicians to implement anything resembling sound economic policy even more so. I think the two go hand in hand. After all we cannot blame politicians for bad policy of the economics profession itself is still utterly incapable of updating itself to take into account its terrible pre-crisis performance. Worse, the constant infighting and name calling within economics has produced the same gridlock we lament in Washington: nothing can change because people’s reputations are at stake.

Economics is well known for the hubris of its leading lights. They are not exactly shrinking violets. It takes a certain kind of arrogance to announce to the world that the profession has sufficient knowledge that the business cycle is defeated. It takes an even more peculiar sort of arrogance to say such a thing and then make no adjustment when the business cycle rages on after you have said it.

I have, rather naively as it turns out, always thought that academics were a group we could rely on to change their minds in the face of evidence. If there was one part of society we could turn to for fact-based discussion it was supposed to be academia. Apparently not. Facts be damned. The neo-religious zeal with which the Chicago School defends its evidently rotten ideas is wondrous to watch. And every time those folks mount such a defense they erode both their personal integrity and that of the profession as a whole. No wonder the fringes of economics teem with apostasy, the high churches are both wrong and too proud to yield.

I am tired of the argument. I have invested too much of my own time in trying to create a space for economics to engage in debate about its own failings. Perhaps I am being too hasty, but I do not detect enough effort to construct a better product. Yes there are all sorts of attempts being made, but the great redoubt remains unchanged. The textbooks remain full of error. The old ideas are simply being re-processed. And society is being short-changed.

Ultimately, I think, it will be the relevance of economics that is diminished.

Professional economics rose in status considerably post-war. It attained a status for professionalism and competence that in retrospect its core ideas were not capable of sustaining. Those ideas were industrial in origin. Its basic structures were derivatives of crises decades ago. Even its great score-keeping ability and its measurement of the center of its attention have become steadily less relevant to the world it seeks to interpret. GDP is a moribund concept and needs an overhaul, but a profession as divided as economics cannot undertake the task. It is too busy fighting the 1930’s wars over and over again.

Speaking of which:

One of the greatest disappointments of this populist moment is the absolutely awful response from the left in politics. I read time and time again that either Brexit or Trump signifies a “crisis in capitalism”. People on the left have been twittering on about a crisis in capitalism since Marx made it fashionable to do so. Leftists have become akin to those religious sects who repeatedly predict the apocalypse and who never change their minds  when their predictions repeatedly fail. Instead of re-inventing a left of center narrative – one with a certain amount of flexibility perhaps – they wander off and yammer on about technicalities, the treachery of less-than-pure colleagues, or the apparent grip on history that the right wingers must have. After all, uncle Karl was surely right.

Well maybe in 1848. Not now. The world has moved on.

And so it goes: both sides in economics, and even the Keynesian middle, seem stuck in a time warp. Yet the march of technology, the change in demographics, the rising interconnection of societies around the world, the change in the nature and methods of business, and the need to re-evisage the nature and impact of growth have all failed to cause a radical re-interpretation of the discipline’s core ideas. They are simply assumed to be timeless and to have undiminished application no matter what happens to the economy.

The last great book on economics was by Keynes. There have been critiques aplenty since, some powerful others not so much, but no one has taken the time to sit down and re-write the core from a deep understanding of the changed world. The flood of formalized work over the past few decades has simply papered over the ever decreasing tightness of the connection between the core ideas and the economy itself. The discipline has become more and more self-referential; its advances more and more arcanely technical rather than interpretative; and its center more and more hallowed rather than open to challenge.

In many ways the entire effort smacks of the 1848 spirit. It attacks with zealous accuracy problems that are, whilst never entirely gone, less and less those we face today. It fails to update its thinking at the same pace that the economy is changing. It lives in the tenured, protected, sedate world of an academia that itself is looking less and less a model for future education. It resists change with a prodigious willpower.

Will the future care?

I don’t know.

But I do know it isn’t 1848. And I do now that the people of the western world need help if they are to avoid this populist moment engulfing the great liberty and prosperity that economics was once proud to have contributed to.

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Practical Economics is Radical?

I have a book by James Meade published in 1975. It’s called “The Intelligent Radical’s Guide to Economic Policy”. Thumbing through it reveals how some things never change and yet, also, how the neoliberal suffocation of economic thinking and policy has allowed us to drift from a socially just economy.

He ends his first paragraph thus:

“The radical in politics is the citizen who places a rather high relative value upon Liberty and Equality in the catalogue of social goods.”

To a contemporary ear his defense of free competitive markets sounds suspiciously apologetic for raw capitalism, but he is more sophisticated than that. He gives us what might appear to our jaundiced minds an old and naive argument: a mixed economy gives us the best of all worlds:

“The intelligent radical thus starts by advocating the removal of all unnecessary restrictions on the operation of free competitive markets. But he recognizes that on the foundation of this market mechanism the must be built a superstructure of governmental interventions and controls. Some of these interventions are needed simply to set a background of conditions in which free competition can work effectively; others are needed to replace entirely the mechanism of competitive markets, where that mechanism cannot be expected to operate effectively; others have an intermediary purpose, namely to modify without replacing the operation of a market price mechanism.”

I see this not as radical, but as pragmatic.

History teaches us, or, rather it teaches me, that freedom of individual action, which in an economic setting means being able to profit from one’s own efforts, skills, and industry, is the best method for assuring rising living standards for us all. I don’t think this is empirically contestable. Ideologues with a worldview that demands denigrating the individual and making it subordinate to some collective identity will, naturally, oppose such pragmatism. But their case collapses in the face of the evidence of the past hundred years. Alternatively, other ideologues whose worldview superimposes rugged individualism on absolutely every economic activity are equally proven false. There are plentiful occasions in which collective action is not just preferable, but more efficient. Besides history also has taught us that such a reliance on the individual leads to socially pernicious outcomes. The evidence is piled up against the ideologues on both sides.

So it is odd, to me, for a practical and inclusive call for a variety of solutions to economic problems to be called radical.

Yet set Meade’s call for flexible policy in today’s context: we have suffered through four decades of policy making that is determinedly one sided. It has been taken as a basic rule that market based solutions are always preferable to governmental solutions. Hence the steady drip of neoliberal policy: deregulation, weak or non-existent opposition to monopoly and oligopoly creation, trade deal making that benefits capital and harms labor, tax structures biased towards capital, opposition to labor union activity, shifting of financial risk onto households and away from employers, a mania for balanced government budgets – even if the result is far from that – and steadfast opposition to the provision of government services in key areas such as retirement or health care, sometimes successful, sometimes not.

Meade is urging us to look at this list and to impose solutions that balance liberty with equality. He argues we ought oppose monopolies vigorously because of the cost they impose on all of us. He argues we ought bias policy towards encouraging and not diminishing competition because that way we all benefit from the enterprise and ingenuity of market ‘winners’. But he also says we need to recognize the downside of capitalism and defend our vision of equality against any slippage towards class domination, reduced opportunity, and, worse, the co-option of government by special interests.

Call me old fashioned, but I think this makes a lot of sense. And it is just about where Bernie Sanders was in his ill-starred run in this year’s primary elections.

Then again he was called too radical by the heavyweights of the erstwhile left in economics. Modern economics, by taking onboard so much of the individualist delusion has set itself determinedly against democratic action. After all it is through our democratic political processes that we express most clearly our desire for the mitigation of the downsides of capitalism. Yet modern economics is blind to that form of expression of choice – it sits outside the market, so economics has no metric to weigh its worth or tolerance for its interruption of so-called market forces.

So perhaps Meade was correct. His is a radical’s guide to economic policy. Being pragmatic, apparently, is being radical. Who knew?

 

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Laughingstock or Fog?

Let’s have some fun:

Economics deserves to be a laughingstock. Really, it does. No one can take it seriously. I have tried. The effort isn’t worth it. This doesn’t mean that there aren’t a ton of interesting things littered throughout the odd landscape of economics, it’s just that most of them are not particularly unique to economics, and that more than a few derive their interest from their absurdity.

Economics is a barrel of laughs.

Truly it is.

Lars Syll has always has fun illustrating just how ridiculous economics has become. He lampoons the leading lights of the subject by directing their own words back at them. By stripping them of their self-glorious righteousness and peculiarly restricted narrowness he reduces me to fits of laughter every time he fishes a juicy quote from one of their murky pools.

Take this from Thomas Sargent:

“The people inside the model have much more knowledge about the system they are operating in than is available to the economist or econometrician who is using the model to try to understand their behavior. In particular, an econometrician faces the problem of estimating probability distributions and laws of motion that the agents in the model are assumed to know. Further the formal estimation and inference procedures of rational expectations econometricians assumes that the agents in the model already know many of the objects the econometrician is estimating”

Now stop laughing.

This is serious. Or, at least, I assume Sargent is being serious.

Think about this for a minute. So distant has reality become for Sargent and his ilk that the obviously ludicrous nature of that paragraph is probably lost on him. So obsessed are economists like Sargent with their little models – I was tempted to say trivial, but I won’t – and their need to make markets into perfectly operating, wondrous, all-conquering, all-knowing, universally true, simultaneously subjective and objective, solution finding collections of individuals who do not act collectively but yet produce collective results that never err (did I miss something?), they have to populate those models of markets with people who know economics better than any economists do.

Not only that, but Sargent says that the people in the models already know much of what economists are trying to find out.

So why don’t economists just ask the people? I mean isn’t that obvious? It would save a lot of trouble, plus economic forecasting would never be wrong. If economists are so ignorant of the economy whilst the people in their models are so knowledgeable, why are we relying on economists to study the economy? The people already know everything. Just ask. Really. Because I think that’s what Sargent is saying.

Don’t get it yet? Then take a second look at what Sargent said. Economists have had to assume that people know everything in order to make their vaunted markets appear to be perfect. That’s their goal after all. This implies, presumably, that Sargent’s model economies don’t have economists in them because he admits economists are still searching for the knowledge everyone else in the models already have, and only people who know everything get to be part of an economic model.

So let’s get this straight: according to Sargent the only people who don’t know about the economy are economists. Right?

You know what they say about Emperors and clothes. Take something for that headache and move on.

It is laughable. It really is. We need not engage with economics, we need to ridicule it.

Then there’s the matter of productive and unproductive labor. What on earth is this? It’s an issue, as David Ruccio tells us, that has a long history inside the economics profession. Some of the big names of the past got all twisted when they wanted to sort out what was and what wasn’t productive. Even Adam Smith and Karl Marx got it wrong. Of course back then the economy was very different: it was still heavily agricultural and industry was novel. It was easy to critique or misunderstand industry when it was relatively small scale and society was still learning how to deal with it.

And everyone had an opinion on what was productive. Usually the answer was ideologically driven – what’s new in economics? What you want to argue is rotten is usually what you “discovered” was unproductive. Alternatively, what you want to be central to your theory is always productive. Naturally. Odd how that works in a science isn’t it?

Anyway the entire question leaves me cold, especially since my background in management and banking condemns me to be doubly unproductive. Most economists just have no idea about what makes a business work. They are stubbornly resistant to any understanding of organization. This allows them to pursue their ideological holy grails with impunity. But it means that their economic landscapes are, to be polite, ridiculous. Instead of a robust middle layer of process and organization where production takes place, economists are stuck in a flat land of two layers: the individual and the whole system. There are no complex components, and businesses, such as they exist at all in economics, are reduced to murky black boxes of no interest. Really, most economists have no idea about business, but they talk as if they do.

Indeed because of the centrality of business in modern economies, economists then go on to opine about the merits and demerits of what goes on in those black boxes as if they know.

One group are, for instance, quite happy denouncing management as unproductive without having an inkling about what management is. They have, it seems jumped to a conclusion that fits their worldview, without disturbing themselves by wondering whether reality reflects that worldview. Management must be unproductive in this view because it doesn’t make anything. As if production was all about making things, and procurement, logistics, organization, negotiation, financing, accounting, planning, design, and marketing were all cancerous afterthoughts weighing down on the production line. And, yes, I know those thing are all costs, but try running a large business without them. See how far you get.

Of course there are other economists who think they have the perfect answer, which is to say they make a different set of assumptions that conform with their different worldview. This second group doesn’t deride management as unproductive, it simply argues that management earns whatever its marginal product is. Which is tautological because the only evidence they have of what management is worth is what management pays itself. So they really don’t have a theory at all. But they sound like they do. Which is what matters in economics.

The fog of ideological preference can get awfully thick, nay impenetrable, sometimes.

Then again any economist arguing that you can separate politics and economics is already taking an ideological position and inviting the scorn of those of us genuinely interested in how economies actually work.

One hint for the non-economists amongst us: generally speaking economies work in ways that professional economics ignores. So don’t ask the economists, just listen to Sargent and ask the people.

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Gordon, McCloskey and Growing Pains

I try to take my own advice: when you have nothing to say, don’t say anything. Thus, for the best part of a month I have busied myself doing other things and staying away from here. It’s been a nice break, and here I am still convinced that there’s not much to say.

The economy is where it was. Economics is where it was. Politics is where it was. The three intermingle, mix, merge, separate and go their different ways in the same manner as before. The same complaints and criticisms are made. The same critics say the same things. Nothing it seems changes.

I think this is what equilibrium must feel like.

Now all I need is some exogenous event to come along and shake things up. You know, like someone being human and changing their mind.

This doesn’t mean that I haven’t been busy. Far from it. I dived deeply into growth. Or, as it turns out, the undergrowth, since the entire topic seems infested with weeds and a tangle of interwoven branches that can easily ensnare the unwary.

It began with Robert Gordon’s massive “The Rise and Fall of American Growth”; it expanded to include Deirdre McCloskey’s epic “Bourgeois Equality”; and finally forced me to retrieve from my dusty shelves Elhanen’ Helpman’s far more accessible “The Mystery of Economic Growth”. Oh, and in the midst of this I added in Richard Heinberg’s “The End of Growth” just to keep a nice ideological balance.

No wonder I have a headache and have nothing to say.

You would think that such an obvious phenomenon as the surge in prosperity experienced in most corners of the globe over the past two hundred or so years would be the centerpiece of economics, but it is not. Growth remains inscrutable to the technology we know as economics. This is mainly because economics reduced itself successively through the years, ending up as a form of applied mathematics mixed with dubious psychology, and a relentless disdain for reality. Since growth is evidently real – like it or not – it gets to be very difficult to explain it from within the confines of such a toxic brew.  You end up with absurdities such as the infamous “Total Factor Productivity” which is a complicated name for the bit of growth that economics cannot explain without recourse to magic. It turns out to be a big bit too: well over half, so the magic is really important.

Maybe economics danced around growth in the early years simply because the rates of growth back then weren’t terribly excessive. Economists clearly knew change was afoot, but they seem to have been obsessed with mechanics and primitive physics rather than movements through time. They wanted to know why and how the economy fitted together rather than what made it change. So they fell foul of a version of the Heisenberg principle: they foreswore trajectory in order to pin down the here-and-now. Eventually this obsession drove them into a strange other-wordly embrace of equilibrium, and various attempts to make the metaphorical invisible hand a tangible, albeit abstract, centerpiece of social interaction.

From within its own redoubt economics is largely successful. Economists actually do think they know something about economics. Whether they know much about economies is the open question. This is because the relationship between economics and real life economies is somewhat vague. Okay, let me go further: it is very vague.

Think about growth.

How do we measure it? Well, in terms that fit nicely within economics. But is what we measure a true picture of the real-life economy? What do we even mean by ‘real-life economy’?

This is something Gordon tries to tackle. He devotes hundreds of pages to detailed descriptions of how the typical person’s way of life has been transformed by the upwelling of technology since the beginnings of industrialization. There can be no doubt that we are massively better off than our ancestors. This, too, is McCloskey’s central point: even the poorest amongst us is better off than our wealthiest ancestors. Growth is a wondrous thing. Yes it is, despite its tarnished reputation of late.

The problem is that much of this leap forward in prosperity isn’t measured by any of our major economic statistics. Gross National Product (GDP) is an approximation at best. It was devised to help western governments manage World War II military manufacturing. It was never devised to measure our living standards, let alone to allow us to compare back in time with the relative lifestyles of our ancestors. GDP is intensely manufacturing oriented. It has huge gaps, not least in its ignorance of home production, and its ability to capture the changes in technology and the increased importance of service sector activity is, how shall we say, primitive.

And economics is stuck with this, and other, poor measurements of real-life economies. Bad or insufficient data is the common grist for the economic mill.

No wonder that economics has such a hard time with growth. If we can’t even measure an economy well, how can we describe one? Or explain it? Or predict it? Let alone discuss its trajectory through time.

This doesn’t mean that economists haven’t tried, but economics-as-history is vastly different from economics-as-machine. And, as I mentioned earlier, the pioneers of economics were a lot more fascinated by machines, mechanics, and the interconnected parts thereof, than they were about narrative or longitudinal comparisons. It was obvious that things were changing, so they wanted to understand what was making the system hum. Why it existed in the first place was irrelevant to them, and how it compared with what came before was much less interesting than how it all came together and appeared to balance so well.

I imagine growth must have seemed inexorable to them. The age of invention and innovation was at hand. The excitement was about understanding systems, not of pondering the consequences of growth, nor of the possibility that the pace of innovation might stall.

This is why it is that economics, when viewed from within itself, has an aura of success. It has answered most of its original questions. That it has done this often by discarding uncomfortable questions is, of course, a blot against its reputation and serves as a reminder that it is actually a very specialized and diminished discipline when set against its puffed up self-regard.

Gordon and McCloskey both do us a great favor in this regard.

Gordon through his unrelenting critique of our understanding of what comparative values in prosperity mean in everyday lives. And McCloskey through her equally unrelenting evaluation of the role of ideas in the acceleration of growth. Her emphasis on the values – her ‘bourgeois’ values – that undergird the entire transformation in society since industrialization is a bold contradiction to the sterility of economics. It is simply not possible to explain growth without reference to its context: the cultural, institutional, political, social, and geographic factors that enabled it to take root.

An economics that fails to accommodate those factors is doomed to prattle on about Total Factor Productivity rather than real things that made a difference in our lives. It is doomed, in other words, to fail to explain growth.

Growing pains indeed.

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