economic theory

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GDP, Growth, Stagnation, Whatever

I am wading through Robert Gordon’s book “The Rise and fall of American Growth”. Excellent stuff. It really is. Although at over 750 pages it is somewhat daunting.

I have also just received in the mail a copy of a book edited by Blanchard, Rajan, Rogoff, and Summers. It’s called “Progress and Confusion: The State of Macroeconomic Policy” I have no opinion of it yet since I only just started skimming through it.

So what?

Well, it seems to me that the current state of economics is neatly summed up by that title: “Progress and Confusion”. Except I think there is more confusion than progress. Naturally Blanchard et al will disagree with me, after all they are heavily invested in the enterprise and so are naturally very protective of it.

But by what criteria ought we judge the progress and/or confusion?

By the arcanity of academic discussion? Or by the relevance, success or failure of policies?

The problem with basing our discussion on the success and/or failure of policies is that it provides a perfect out for economists. They can always argue, as they frequently do, that policy failures are a reflection of the imperfections of policy makers or politicians. It isn’t, in this version of the argument, the errors of theory that cause bad economic realities, it is the errors of execution of jolly good theories. Rotten outcomes, it appears, are never a consequence of bad theory. They are an consequence of bad practice.

Really?

Given that economics doesn’t exist as a central single school of thought, but as a disparate archipelago of sometimes related but often contradictory opinions, it is altogether too easy for economists to slide away from responsibility. The problem is that they take immense pride in the disjunction of theories. They can slip from one to another like magicians without ever having to explain the underlying problems, or to admit the sleight of hand. Indeed they all too often simply dismiss problems as ‘having been settled’ even when there is no settlement. They simply prefer to forget, or, if I am being more generous, they never knew in the first case that the problem was genuine. In which case the alleged ‘settlement’ is more akin to an urban myth passed from one generation to the next and eventually accepted as a truth. I won’t mention the great unsolved capital debates as an example of this, because as we all ‘know’: that is settled theory.

Anyway let me illustrate the confusion in order to question the progress.

On page 165 of the Blanchard et al book we find Vitor Gaspar saying this:

“Assumptions necessary for market efficiency are unlikely to hold in the real world”

Let me stop here: “unlikely”? How about “never”? Unlikely is an attempt at evasion. Let’s be clear: the assumptions for market efficiency are never going to hold in the real world. Which is why those assumptions are stupid and irrelevant.

But let’s go on:

“We know that market failure is pervasive and so does not provide much clarity about when governments should or should not intervene.”

Let’s take a look at this. “We know that market failure is pervasive”. Yes we do. So pervasive that any reference to “failure” is devoid of meaning. How can the regularity in reality be a “failure” of reality? It is reality! It’s a bit like saying that life is a “death failure”. It has no meaning or relevance to the study of the object of study. Only economists can pervert the world so much that all we see around us has become some form of exception rather than the rule.

Please proceed:

“Clearly, full symmetric information, complete markets, an absence of externalities, perfect competition, and an absence of transaction costs do not prevail in the real world”.

Which is precisely why we ought not study them. It’s a waste of time.

“And this list does not include human behavioral flaws, which further contribute to market failures: limited computation capacity, myopia, envy, greed, fear, and much else.”

So much for rational choice theory.

So far I am loving Gaspar: he is nailing the lunacy of a majority of economics. It is being revealed as an exercise in the construction of monumental imaginary ghosts that clever economists can then slay with equally imaginary weapons, and at no point does it intersect with reality. It isn’t supposed to intersect: it is a thought experiment rather than a scientific exploration.

But then, ugh:

” … it follows that possible failures of government intervention must be taken into account as well. As Brad DeLong put it in his contribution [in the same book] ‘We know that as bad as market failures can be, government failures can be often little if any less immense'”

Oh no!

Not content with the concept of market failures, which really isn’t a concept because markets are always failing, and so failure is the norm, or the success, if you will.  Now we have government failures. By what criteria do we judge a government failure? By the same irrelevant standards of artificial life that we judge market failure?

This failure fallacy is ridiculous.

What about reality is it that economists so dislike that they must resort to calling perfectly usual human relations “failures” even though those relations are everyday, historically and empirically normal, pervasive, endemic, recognizable, measurable, and entirely standard?

Enough with this failure fallacy. Economics needs to start over as a discussion of reality as it is, not as it “ought to be”.

And, what, you may ask reasonably, does this have to do with Robert Gordon?

Well, it occurs to me that the current discussion about secular stagnation and the “end of growth” assumes that economists know about “growth”, about what it means, where it comes from, and how to measure it. The more I read the less sure I am that they do. Take GDP for instance: it’s a very good measure of certain things. It is a very poor measure of others. And some things it doesn’t measure at all. Yet all relate to our wellbeing or feeling of prosperity.

So what is ending? What is stagnating?

Do economists know?

Or is it another example of failure?

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Market Reflex

There are a few thoughts or words in a normal economics discourse that trigger what I call my ‘market reflex’.  Asad Zaman just triggered it. Of course he didn’t mean to, and the sentence in question is in an article I agree with. Further, the sentence, on the surface, looks and sounds so innocuous. Here it is:

“Free market economists believe that markets work best when left alone, and any type of government intervention to help the economy can only have harmful effects”

See what I mean? Innocuous. Asad is totally correct, they do think that. Worse: they mean it. And even more worse: they teach it.

Which gets me truly bothered.

The entire enterprise of contemporary economics, aside from its fringes, is built on this shady and unsubstantiated premiss.  It’s shady because it is laden with ideological bias, and it’s unsubstantiated because, well, its unsubstantiated.

Which gets me even more annoyed.

The supremacy of markets sitting at the heart of contemporary economics is a faith based notion not an empirically based fact. It is the result of economists of a certain ilk having vivid imaginations and strong biases. When you push a little on the idea you find that it relies on a set of thought experiments rather than on research of the real world. It requires superhuman and distinctly otherworldly computational skills, flows of information, and ironclad willpower, not to mention a total lack of real choice on the part of the denizens of this imaginary market, for it to work smoothly and to find its way to the happy land called a utility maximizing equilibrium. Only within such ridiculous constraints is the so-called superiority ever exhibited.

The rest of the time stuff happens and who knows what’s best?

It is the obsession with sanitizing the economy and thus rendering it unreal that has led economics astray over the years. And this article of faith about free markets working best when left alone, is sheer tosh.

Just to press my point further: for the dream land of economists to display such a characteristic it would have to be inhabited by two sets of parallel and never interesting people. One would be the superb calculating machines of the erstwhile free market. The other would be the foolish idiots of the political system.

You see, and this bugs me most of all, the ‘agents’ of the economy that economists model and who, in those models, produce such startling efficiency – so startling that it cannot be improved upon – are the same ‘voters’ who support government intervention to soften the edges of the economic machine. Apparently economists are oblivious to this rather salient fact. I suspect they are oblivious on purpose. For to acknowledge the reality of democracy and voter involvement in government treads heavily on the pristine ground economists have carved out for themselves. By separating the economy, or, rather, the ‘market system’ from society as a whole they can pretend that it is a self-enclosed entity bereft of outside influences that might muddy their simple models. And it means that they can indulge in anti-democratic theorizing without actually being anti-democratic: democracy is a dirty government thing, it isn’t part of the market system.

I remember reading Hayek’s famous paper on knowledge in the economy in which he lays out the argument about central planning being a hopeless adventure and asking myself how, if the world is that complex, anyone can know whether any system is better than any other. You can’t. If the information is so difficult to gather and compete for a centrally planned system, on what basis do we have to conclude that a decent rally planned system cannot be improved upon?

Well, it turns out, we can make that determination if we rig the model and the calculations upon which we rest our argument.

Which is what Friedman and the other followers of Hayek have done.

They have no ‘proof’ other than an artificial test tube model that they created especially to produce their proof. Garbage in, garbage out.

Or, as Friedman so famously argued, it really doesn’t matter how insane your assumptions are as long as they produce the ‘right’ results. Friedman, of course, knew what result he wanted:

Free market economists believe that markets work best when left alone, and any type of government intervention to help the economy can only have harmful effects.

So there.

Scientists at work.

Not.

 

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101 or Not 101- Uber Knows?

Paul Krugman has this in his blog today:

The name is a takeoff on Noah Smith’s clever writing about “101ism”, in which economics writers present Econ 101 stuff about supply, demand, and how great markets are as gospel, ignoring the many ways in which economists have learned to qualify those conclusions in the face of market imperfections. His point is that while Econ 101 can be a very useful guide, it is sometimes (often) misleading when applied to the real world.

My point is somewhat different: even when Econ 101 is right, that doesn’t always mean that it’s important – certainly not that it’s the most important thing about a situation. In particular, economists may delight in talking about issues where 101 refutes naïve intuition, but that doesn’t at all mean that these are the crucial policy issues we face.

So why is 101 what it is?

A significant number of students are exposed to economics only through Econ 101. They never intend to become economists, they simply want to learn something about the economy. Yet, as Krugman admits, 101 is full of hypothetical purity about markets. It isn’t a representation of actual economies. It is a distorted and ideologically driven account of what markets might be under conditions so remote from reality that we can dismiss the whole thing as absurd. No one can learn about the actual economy from sitting through Econ 101.

Why do economists insist on creating this stalking horse called a ‘perfect market’ only to bash it as ridiculous later on? Why not begin with something more attached to the real markets students are likely to encounter? And why do they bash it in classes that only future economists attend? Is this some secret plot to ensure intellectual superiority over the naive souls who fell for the misleading nonsense in 101?

Even when 101 is right – according to Krugman – it needs to be set aside as often irrelevant.

His own area of trade is a good example. The notion competitive advantage gets lot of air time. Economists love talking about it because it is not self-evident and thus it makes them look smart for having it in their arsenal, but it only makes sense in the context of a few other ideas. Like the one where displaced workers will find new jobs instantly and so the benefits of trade are unhampered by the cost of lost jobs. Sure. Tell me another one. One simple model can look very clever, but those darned interconnections make things murky very quickly. Which is why most economics ought to be taught in the context of reality.

Which, more often than not, Econ 101 is not. How could it be? It’s mostly a plan attempt to indoctrinate students into believing a particular perspective: that governments are bad and that markets must be ‘free’.

I read that the CEO of Uber repeats a favorite line when asked how his business model is so financial successful: “It’s just Econ 101” he keeps saying. Which is tantamount to saying it’s a fairy tale. Investors beware! Especially when, as someone has now pointed out, that if Uber drivers are all independent contractors, and not employees, ought they not then compete on price and not collude by using Uber’s pricing platform? Uber, it turns out, is one of those exceptions to Econ 101 that one learns about later on after the indoctrination. Uber is actually a massive price-rigging scheme by a whole bunch of independent drivers, and the Uber CEO is acting to encourage the collusion.

Such are the lessons of Econ 101?

 

 

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New York Stops The Revolution in Economics Too?

Yesterday’s election result in New York State effectively ended Bernie Sander’s tilt at the Democratic windmill. Here’s what I wrote to a friend who was intent on parsing the numbers:

And, the point is?

We can analyze all we want. It doesn’t alter the result. It provides nice fodder for coffee shop talk, but doesn’t help anyone.

It’s time to move on. Bernie will keep going. Clinton will become even more annoyingly patronizing. Her surrogates [like Krugman] will gloat. She will likely win in November. And America will struggle on regardless.

Clearly 2016 is not the year of change. It is a year of upheaval on the right, complacency in the center, and only the beginnings of rebirth on the left.

I never imagined that the Democrats would be the party of centrist corporate establishment thought. Or that it would be the Democrats enforcing the wishes of big business over and above those of the working people. But that’s where we are.

I suppose none of this is a surprise. The total dominance of social/cultural issues as a defining line in politics has obscured the equally powerful dominance of right wing economics across the board. Neoliberalism is the monotone ideology of both parties.

The revolution will have to wait.

Buried in there is my attitude towards economics. By enabling neoliberal ideology, and following the lead of Hayek and Friedman, economics debases the role of liberal democracy and representative government. This casts a long dark shadow across the subject.

Never has it been more clear to me that, notwithstanding the professed personal positions of individual economists, contemporary economics has become a profoundly anti-democratic project.

This is ironic only with respect to longer history.

The 1930’s were critical in the demise of the democratic tradition within economics. The setting into concrete of its severe limitation as a subject dealing primarily with the mathematics of choice and allocation was masked only temporarily by the superficial victory of Keynesian macroeconomics. The intellectual catastrophe of the 1970’s and 1980’s, which saw the emergence to superiority of the formalized ideologically anti-democratic version of economics that now dominates, was merely a logical extension of the 1930’s limitation.

The subject finally emerged as a tool for performative reconstruction of society. Its methods were exported to ensure the elimination of alternative viewpoints. Its dogma was translated and accepted into the prevailing faith for business strategy, economic policy, and many other aspects of socio-economic life.

Even the supposed schism between various flavors of macroeconomics which gives great life to the academic elite and provides large numbers of hand-wringing articles about the state of the discipline is trivial when set beside the socio-political stranglehold neoliberalism has on our society.

When the major debate about ‘what went wrong’ is being conducted by the same people who led us into error; when that debate is conducted entirely in the same theoretical framework as that of the error itself; when the policy outcomes are only relatively modified; and when the entire discussion seems so unrelated to the day-to-day actors who populate – or are supposed to populate – the markets and economies that economics is meant to understand we know that nothing will change.

Don’t we?

Until economics rids itself of the fantasies of equilibrium, maximization, and the pursuit of an efficiency that cannot be located in an uncertain world, it cannot be much more than an narrow academic pursuit. Right now, by convincing itself of the efficacy of its method, and by the unethical exportation of that method into subject matter where the simplicity of economics has no relevance, economics has managed to make itself into nothing more than a technology for the exact opposite of its original intent: it is no longer trying to understand economies. It trying to invent them.

It is social engineering.

And like a lot of twentieth century social engineering it has become a very sinister undertaking.

Let’s take it back.

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Pre-existence

One of the mysteries of economics is its contemporary willingness to ignore everything around it. Economists act as if the economy they study is easily isolated from its surroundings and thus immune to the trends, problems, and changes that go on in those surroundings. Indeed this isolationism is a key component of economics because it allows the profession to preserve and bolster its pretense to being scientific.  It allows economists to chat away blithely without concern for the web of entanglement within which actual economies reside. Instead they can pretend to have discovered timeless regularities that allow the ‘system’ to glide smoothly and effortlessly towards a singularity, unsullied by the nastiness of the self-same system’s attachment to other social realities.

It is thus that economists indulge in their fantasies of social physics, and consign anything that interrupts the aforementioned smooth glide to the horrible non-economic netherworld known as ‘exogenous’ forces.

A netherworld which you and I refer to as ‘life’.

It is as if the economy was plopped pristine into a pre-existing reality, with the shape of that pre-existence fitted perfectly to conform with the analytical demands of economics.

Then, given this happy circumstance, economists sally forth armed with what they regard as superior social knowledge and freely advise those who are daft enough to listen, or, worse, to impose their designs on society in order to maintain and improve the fit between their fantasy and that pre-existence.

This ignorance of pre-existence results in some of the more infuriating abilities we note in economists. Such as the sublime ability to ignore the contradictions in their theories.

On the one hand we are told that the world is just too complicated for central planning ever to produce an efficient solution; yet on the other we are taught that just such a solution is possible through decentralized planning. Efficiency, it seems, can be wrung from complexity despite itself. This miracle is the result, not of some amazing force of society, but of careful theorizing. Whereas central planners are inept at computation and have cognitive overload in the face of torrents of information, decentralized markets suffer no such failure. They digest information easily and precisely. They compute at prodigious speed. They never err. They always excel.

How come?

By assumption.

That is to say the pre-existing messiness of society is neatly swept away and replaced by an imaginary order tailor-made to fit the needs of a system that must portray its allocative superiority in order to be taken seriously.

Central planners, it seems, are always mired in their pre-existing muck and murk. Decentralized markets are pristine, crystal clear, and shorn of attachment to anything that might muddy things up.

By assumption.

This is not an advantage based upon observation of real economies. It is an artifact of need. Economists needed to eke out a win for decentralization back in the dark days when capitalist economies looked a little shaky, and central planners looked a tad more successful. Since that would not do – it didn’t conform with the ideological roots of modern economics – something had to give. And in the case of economic theory it was reality that gave way.

All those pre-existing institutional constraints, all that culture, all those power relationships, all that path dependent behavior, all that ugly uncertainty, all that geographical and social diversity, all those socially constructed relationships and personal networks, all that patchy opportunity, all those various biases and prejudices, all that discrimination, all those technological convulsions, and all that accumulated knowledge had to be swept aside. It had to be assumed away and made to be of no importance. Heck with it all.

No, economics need not delve into such ugly matters. Economists could leave that stuff to lesser social theorists. They could abstract the economy up, up, and away, from anything that might taint the relentless pursuit of rational choices, optimization, and, most of all, the happy arc towards the stasis of equilibrium.

It has never worried economists that the denizens of their model economies, the ‘units’ or the ‘agents’ who do the exchanging in their test tube markets, are the self-same idiots who vote for redistributive government policies, who blithely ignore incentives and undertake all sorts of irrational activities, who constantly change their minds, muddle up their priorities, mismanage their budgets, and generally screw up their financial lives. Yet those dunderheads then are able to become paragons of rationality and automatons of decision making when they pop up in a market.

This extraordinary leap from one extreme to another on the part of the actors at the center of their so-called science seems not to concern economists. It’s a psychological gyration of epic interest to anyone interested in humanity, but of no interest at all to economists. When you unmoor yourself from reality such make-believe behavior can become normal.

I suppose its one of those pre-existing conditions we hear so much about when we discuss health insurance. And just like the health insurance industry, in order to arrive at the result they want, economists ignore such conditions.

After all, that ugliness pre-exists economics. So it’s not part of the subject matter.

How convenient.

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