economic theory

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Economics as Storytelling: McCloskey Again

This is not new to most of you of course. You are already steeped in McCloskey’s Rhetoric. Or you ought to be. After all economists are simply telling stories about the economy. Sometimes we are taken in. Sometimes we are not.

Unfortunately McCloskey herself gets a little too caught up in her stories. As in her explanation as to how she can be both a feminist and a free market economist:

“The market is the great liberator of women; it has not been the state, which is after all an instrument of patriarchy … The market is the way out of enslavement from your dad, your husband, or your sons. … The enrichment that has come through allowing markets to operate has been a tremendous part of the learned freedom of the modern women.” — Quoted in “The Changing Face of Economics – Conversations With Cutting Edge Economists” by Colander, Holt, and Rosser

Notice the binary nature of the world in this story. There are only the market (yea!) and the state (boo!). There are no other institutions. Whole swathes of society vanish or are flattened into insignificance. The state is viewed as a villain that the market heroically battles against to advance us all.

It is a ripping tale.

It is shallow and utterly misleading.

The problem McCloskey has is that she constantly battles her own Chicago roots and those roots sometimes – not often – surface in this same way. Markets good. State bad. Nothing else matters.

This binary and overly simple view of the world is common throughout economics. We are constantly being asked to set the market alongside the state and leave other things aside. The word ‘society’ is such an anathema to economists that they seem to have forgotten its existence. And thinking of institutions as playing a role in our everyday affairs is definitely déclassé. Except, of course that both the state and the market are institutions, but let’s not dwell on that.

Somewhere in the tale told by McCloskey the market rode in on her white horse, struck down the nasty masculine dragon we know as the state, and women were happy ever after. Why were they happy? Because they could become independently prosperous and could, therefore, flourish away from their prior enslavement.

Presumably markets didn’t exist throughout those aeons of prior enslavement. Presumably only states did.

Which implies that McCloskey’s vision of what a market is must be extremely historically contingent. At some point they must have morphed into the dragon slaying kind. At some point they too must have been set free to accomplish their magic. Quite how we have to ponder another time. After all with a binary vision of the world and with the state perpetually the villain markets had to self-liberate. Which, I suppose, implies that the entire history of modernization, liberation, advance, enlightenment, and such can be reduced to market forces.

So markets are epicenters of learning, philosophy, the arts, politics, and all other good stuff.

Except they are impersonal.

At least according to Brian Arthur’s summary of the structural foundations of general equilibrium analysis. I take this quote from the introduction he wrote with Durlauf and Lane to their edited volume “The Economy as an Evolving Complex System II”:

“In general equilibrium analysis, agents do not interact with one another directly, but only through impersonal markets. By contrast, in game theory all players interact with all other players with outcomes specified by the game’s payoff matrix.”

I choose this text not for its unique insight but for its brevity and ease of use.

Neither of these alternative forms of analysis seem, to me, to be very plausible. Game theory has its specified payoff matrices and has all agents interacting with all other agents. How anything ever gets done given all this interacting I shudder to think. But that’s beside the point for now. What I want to give more attention to is the nice summary of how most mainstream economists view a market. The key word being impersonal.

What does impersonal mean?

Meaning number one is ‘the lack of personal feeling’. Synonyms being objective, neutral, unbiased, dispassionate, unattached and so on.

Meaning number two is ‘not existing as a person’ or ‘having no personality’.

So the market, according to economists, is a place devoid of feeling. Bereft of emotion. It is a cold landscape where calculation and self-advancement dominate over other less worthy sentiments like cooperation and altruism. And where enslavement over aeons is likely to have been established only because it fulfilled some utterly rational and  utilitarian role. Markets, in this narrative, don’t care. They are places of cold rationality, not places of heated debate.

I happen to think markets are never impersonal. They involve people: always and everywhere. So the notion of an impersonal market is nonsense from the very beginning. As a rhetorical device or as a starting point for analytical purposes I can tolerate them for a nanosecond or less. But as a permanent feature of a theory about human behavior they are – how do I put this? – rubbish.

Now it is quite possible that in her departure from Chicago McCloskey also rid herself of the impersonal market notion. But I am not so sure. From my point of view a market full of human beings is also a market situated in a lush and diverse social setting. This is by definition since humans are surrounded by all sorts of institutional manifestations of their creativity and search for structure.

Which gets us back to the binary problem we started with.

It is only in a society rich with alternative networks and channels of development, of outlets for expression and argument, and of institutional ways for accepting or enforcing progress, that the riddance of enslavement can take place. A binary split between an evil state and a virtuous market will not do. Such a split is a device created by economists to make their lives easy and merely suffices as an ideological crutch in their libertarian adventure.

As part of a narrative about the steady rise of freedom in our modern world it just doesn’t work.

Markets don’t care. But McCloskey does. Yet she persists in calling herself a free market economist.

Why?

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Some Issues Re-visited

Hmmm.

It seems that some people misunderstood my comments regarding neoclassical economics.

Allow me to reiterate and, perhaps, clarify.

I want to say that I regard neoclassical economics as a triumph. A wonderful achievement. Brilliant.

Please read the fine print: that brilliance has nothing to do with relevance, reality, or any other such yardstick.

All I am saying is that within its own confines, with regard to its own rules, and with respect to the limits placed upon it by its multitude of excellent practitioners, neoclassical economics has been an extraordinary success.

Further, and more to the point, I am saying that the number of instances of economies we find within the space of all possible economies described by neoclassical economics is tiny. So tiny we are unlikely ever to experience one.

So tiny that neoclassical economics, triumph or not, can be regarded as insignificant as having valid application to the vast majority of instances within that space.

It is thus a triumph, but a useless triumph.

At its very best – and this is an enormous stretch – it acts a very rough and dull caricature of the kind of economy we actually experience. Like all caricatures it has a vague resemblance to what we find around us, but on closer inspection it totally lacks the necessary detail for us to use as a portrayal of reality. It is useful, therefore, as a tentative first step, but we must discard it immediately if we want to delve far into any economy we are likely to encounter.

There may be economies, somewhere, that resemble those of neoclassical economics. People in those economies may actually be the oddballs that neoclassical analysts have theorized about. The firms may act along neoclassical lines. All the bizarre and twisted assumptions that the neoclassical system requires to possess the internal coherence that it demonstrates may actually exist in that far off place.

That they don’t here on planet earth is my point.

That actual economies require a different economics, a better understanding of human behavior, and a less weird description of business, does not detract from the intellectual achievement of the people who built the neoclassical system. It simply means that their effort is irrelevant. It means we all need to stop picking holes in something that, by its own measures, is a great success, and that we ought, instead, build something else. Something that stands up to a more rigorous set of standards.

Something that, in other words, requires rigor not to mask irrelevance and insufficiency, but, rather, to reflect the instances of economic activity we are likely to encounter. Rigor as elucidation not rigor as obfuscation ought guide us.

It is time for us to stop taking the easy route of simply picking at the strange world posited by the neoclassical thinkers, and to start replacing it.

And, as I tried to say before, I think that means ditching simplicity and replacing it with an embrace of complexity.

We ought leave those infinitely small instances of supremely simple economies that must lurk in the distant corners of the space of all economies somewhere to the neoclassical folk. Well done them! Our job is greater and more difficult. It is also more important and relevant.

We need to build theories that match the complexity of reality. Where we understand reality as being the majority of instances of economies we are likely to encounter in real life.

Does that clear things up?

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Some Issues

First:

I have finally arrived at the point where I can give orthodox simple economics its due. It is a triumph. A system of thought well conceived, brilliantly executed, coherent, consistent, and pretty much complete. Bravo. I love it.

As long as we are trying to examine economies consisting of one or two prescient households, a couple of firms of exquisite accounting excellence, one or two products that are easily substituted for one another, as long as there is no uncertainty, no relevant time, and as long as these various actors can calculate everything at warp speed, we know everything we need to know about economics. The game is over.

As I say: well done everyone.

These unbelievably simple little economies, I assume, must exist somewhere. And wherever they do we can explain them easily.

Where they don’t is another matter.

Orthodox economics is simple economics. Simple.

Second:

Unfortunately the overwhelming number of possible economies are more complex. Orthodoxy simple theory tells us little in these cases. What it does is to try to simplify life back downwards and crunch it into the simple space it explains well. It acts as a kind of perennial first guess. It is a stab at understanding, nothing more. In the absence of a fully worked through complex economics it is all we have.

Complex economics is the future and is made possible by the development of technologies and ideas – some decades old – that allow us to get beyond simple economics. It will allow us to substitute more well thought through ideas for those rough guesses we have inherited from the simple work thus far accomplished.

Third:

No. Slathering scads of formalism all over the place does not constitute complex economics. It quite often simply hides the lack of a complicated narrative underneath.

Fourth:

I am also trying to get beyond – although clearly I haven’t yet succeeded – using the words orthodox and heterodox. What was orthodox is now heterodox and vice versa. Thus the words have little enduring relevance. Which is why I now prefer simple and complex.

Yes, I realize that those two new words can be muddled up too. But they aren’t yet. So they will have to do.

Fifth:

Structure matters. So do institutions. So does time.  Any economics that takes for granted its context isn’t worth much. It remains too simple for the real world.

Sixth:

Information is all. All is information. Economies translate matter, energy, and information into stuff we need or want. The great cycle of creativity that sits squarely at the center of an economy is the constant shuffling about of information. We infuse matter with order courtesy of the information we have at hand and the input of energy. This process is the most important aspect of an economy. We then consume, which is the disordering aspect of the cycle. Disordered matter doesn’t disappear. It loses its use value. We call it depreciation, dissipation, dissolution, and so on. It doesn’t matter what we call it. Humans order and disorder their surroundings. They create and consume.

Labor is energy and information. Capital is matter and information. Land is energy and matter. A simple production function thus creates confusion. A complex production function would not.

This sounds kind of thermodynamic. That’s better than simple because simple ignores energy, matter, and information. It ignores the cycle. It contains no process and sits outside of time. It has no direction. It has no purpose.

Seventh:

Simple sits on top of, and presumes, the cycle of creativity. Hence its inability to relate well to the environment, to real world production, to innovation, and to a host of other activities embedded in the structures, institutions, cultures, and networks that provide the basis of an economy.

Simple takes the world for granted, which is why it gets flummoxed so often by growth, change, or other phenomena that exist in time.

Complex will be an improvement on this determined ignorance.

Eighth:

Economies appear to accrete information through time. They get more complex. This appears related to the division of labor. Whether they are the same phenomenon is another matter. Simple economics cannot account for the accretion of information. Complex economics can. Which is why complex economics helps us understand growth and possible alternatives to growth.

Ninth:

Complex economies are in a constant state of becoming. They never arrive. They contain within them both the consequences of the past and the construction of the future. They have paths constrained by history. They are always in flux. Complex economics will interpret and embrace this flux. Simple economics cannot.

Tenth:

So we move on.

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Information Matters?

Sorry I have been absent here lately: I am in the middle of several projects that take priority.

Nonetheless in the course of one of those projects I have found myself immersed in the many faces of economic theory with respect to the role of government in an economy. That role appears to lurch from one extreme to the other, which leaves the impressionable outsider having to resort to their political predisposition in order to seek an answer. Economics, you see, has many answers. Some of which flatly contradict others.

So much for science.

The problem begins at the beginning. The beginning, that is, of economics itself. The early pioneers of the discipline were captivated by the apparent order they saw around them, and especially by the seeming ability of goods and services to turn up and satisfy demand without being ‘planned’ into being. This led them, naturally, to build into the subject a bias towards a market-centric explanation of everything. For it was the mystery of the market that they attributed this seeming order to.

Well one thing led to another and we ended up with an almost comical attachment to ‘the market’, very often with no real description of what that actually was. The market is shrouded in its own mystery, with its super-human powers flowing very much from that mystery. Strip the mystery away and the market becomes a whole lot more prosaic. Plus the elegant math used to describe its machinations begins to look very contrived.

It is one thing to marvel at what you think of as a great mystery needing explication, it is another entirely to become so fanatical that you tolerate not a single hint that the mystery might be slightly less than magical.

Yet that’s where we are.

In order to protect the object of their desire from the rude realities of its earthly manifestation, economists made a series of transitions in thought, with each adding layers of complicated theory in order to cover up or atone for what were perceived as prior weaknesses.

Towards the end of the 1800’s one such transition was so radical that it implied that all previous theory was not about economics at all. In  an effort to put economics on a more ‘scientific’ standing its subject matter was progressively narrowed. No longer were the big issues of where wealth and growth came from of any concern, what mattered now was exploring and describing the logic of the magic. Note that there was no doubt about the existence of the magic, that was presumed, all that economics was now to be concerned with was its inner workings.

In the 1930’s this led to an explosion of economic enquiry and argument.

At one extreme Oskar Lange could argue, quite plausibly, that if all the conditions of the magic obtain in a real economy, then socialist organization is not just a possibility, it is guaranteed to work. This set capitalist-leaning economists aflutter. They had to counter attack. One result was that Friedrich Hayek, whose libertarian politics could brook no morsel of socialism entering contemporary political reality, began to argue that the economy was actually a learning device and that, since knowledge was so unevenly distributed in any economy, and was thus well beyond the ken of any government, a decentralized marketplace was the best possible solution to the problem of coordination.

Note that the big problem of economics was now firmly coordination and not those older issues of wealth and growth. Although people like Hayek conflated the two traditions: the libertarians argued that market coordination was also the best longer term guarantor of ‘sustainable’ growth. By sustainable they did not – and still do not – mean sustainable in an ecological sense. What they mean is that growth can be sustained on a robust long term path, albeit with periodic interruptions due to the ups and downs of the business cycle.

Also notice that Hayek, in order to fend off Lange and his evil socialism, had to introduce a decidedly uneven vision of knowledge. In the Hayekian world knowledge was a very local and lumpy affair. Individuals were therefore likely to be much more attuned to it, whilst the government would inevitably be defeated in any attempts it made at gathering, assembling, and analyzing for policy purposes that self-same knowledge base. Such local knowledge is forever inscrutable to the central planner.

The problem with this vision is not its lack of reality. Indeed the Hayekian view on knowledge is a very realistic one. It’s that it seems to fly flat in the face of the parallel efforts being made at the same time to establish the concept of ‘general equilibrium’ as a central fact in economics. Since the days of Walras, economists obsessed with the apparent order of the economy had made attempts to describe the coordination problem in terms of all markets simultaneously. That is to say they sought to describe a world in which all markets, however diverse and seemingly disparate, would magically fall into place together at the same time. This requires prodigious calculation, but market magic was assumed to be up to the task. It was only after making a series of ever increasingly absurd assumptions that economists were able to arrive at a suitable description of such a general equilibrium. Only the very honest amongst them then stepped back and admitted the effort was worthless since those assumptions were so heroically other-worldly as to render the entire effort barren of practical use.

Amidst all those assumptions are one or two that imply information is both freely and widely available to all the players in the economy.

On the face of it this isn’t exactly what Hayek had in mind when he argued knowledge was fragmented and local. After all, how can knowledge be freely and widely available and yet fragmented and local at the same time?

On the one hand we have a theory that, in order to describe market magic as being, well, magical, has to allow us all to have equal access to all the relevant information we need in order to undertake our transacting calculations. And on the other we have a theory that depends upon that same information being impossibly divided and split apart such that no one can assemble it, least of all to undertake transacting calculations.

You might think this dichotomy would be an issue.

On one side the libertarians argue that the government has no role in the economy because it could never gather enough relevant information. The economy, they argue, is just too complicated for anyone to understand, so we ought leave it be. And others argue that the government has no role in the economy because everyone knows exactly what’s going on and can therefore both predict and defeat even the most well intentioned actions of the government. The economy they argue is perfectly understandable as long as everyone thinks and acts like economists theorize they do.

Either way the government doesn’t have a role to play.

If this sounds a tad ideological to you so be it. We are told this is all science.

Meanwhile it sounds to me as if information matters. It really matters. But as of now economists cannot quite agree on how.

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Natural Liberty or Democracy?

There seems to be a lot of angst as to why standard macroeconomics ignores the government in its analysis. Or, rather, that when the government slips into the picture it is almost invariably in the form of an evil presence mucking up the sweet operation of market magic and thus stalling us all on our way to the happy place economists love to call equilibrium.

This is quite simple to answer: economists of the standard ilk are opposed to democracy.

Why?

Because, since its very inception, modern economics in most its forms has been the study of the private economy. Listen to Quesnay:

“All trade ought to be free … It is enough for the government to watch over the way the expansion the revenue of the kingdom’s property; not to put any obstacles in the way of industry; and to give the people the opportunity to spend as they choose”

Listen to Adam Smith:

“According to the system of natural liberty, the sovereign has only three duties to attend to … the provision of national defense, the provision of civil justice, and the duty of erecting and maintaining certain public works and certain public institutions”

Further, according to Smith, the economy was so complicated and worked in such an obscure yet magical way that it was here folly for anyone to imagine they could constructively interfere with its working:

“The statesman, who should attempt direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but would assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”

In other words: government ought get out and let laissez-faire do its work.

Of course we should doff our hats to those who argued for a modicum of modesty on the part of market magic. McCulloch, for instance in 1848, gives us this more pragmatic view:

“The principles of laissez-faire may be safely trusted to do in some things, but in many more it is wholly inapplicable; and to appeal to it on all occasions savors more of the policy of a parrot than of a statesman or a philosopher.”

We could go on, but what’s the point? What we all need to remember is that economic theorizing, and thus the theories we find cluttering our discourse, are all historical artifacts. They were created in various times and places to respond to what were perceived to be great issues of the day.

All those quotes above share a common theme: that of an attempt to break society apart so that the economic aspects of our lives can be considered a separate domain subject to its own rules and theories of operation. This was important because as modernity took hold and as older more traditional structures, especially those of autocratic monarchist governance, were challenged people needed new tools and insights to justify the change.

Thus all the prattle about something called “natural liberty”. It was essential to present such liberty, which was a dire threat to the old order, as being somehow “natural” since that made it more difficult to object to. If it’s natural we just have to live with it. Don’t we?

This original perspective became deeply entwined with economic theorizing and has remained ever since, albeit carefully hidden in the attic of such theorizing. It lingers on in every economics text book where the economy is presented as a domain somehow apart from the other, and supposedly less rigorously theorized, aspects of social life such as politics and sociology.

This fracturing of the social sciences is perpetuated for a number of reasons. It provides great job security for academics who specialize in one or other part. They don’t have to rise to any meta level and discuss the messiness of society in toto. Instead they can opine as experts on some arcane locality, whilst occasionally being asked to comment on the map as a whole. Naturally, when they do so opine, they are careful to ensure that we acknowledge their expertise is insufficient for their global comments to be taken too seriously.

Economists are the exception to this modesty. They brazenly ramble all over the social field commenting on things that their expertise in no way equips them for. This is what I call the “Becker Effect”. For some bizarre reason economists, having carefully limited the economic domain as being unique enough for special theorizing, then presume that the theories developed for that unique domain can be generalized far afield. This is an arrogance that we would all laugh at were they not so determined. And the reason that they are so determined is that they have duped themselves into believing that they have insight into human behavior through the entry way of their microeconomics. This, as we all know, is the place where economists pretend humans are automatons. And not just any automatons: they are automatons that think like economists. This leads us to the not too pretty situation where those automatons are prone to cheating and conniving, because, again as we all know, those who study economics also tend to display those less than socially sound behaviors.

But, perhaps the more important legacy that natural liberty, whatever that is, has left us is, the notion that government is a separate domain from the economy. Don’t forget that back in the days of Smith, and nowadays in the age of the Chicago School, government was the state, and the state was some meddlesome individual intent on extracting wealth from his [or, rarely, her] much put upon citizens. In other words the state was a source of hostile oppressive intrusion. Including it in a comprehensive analytical framework for society as whole made no sense: if you did that you had to concede that naked power relations played a significant part in trade, commerce, and so on, thus denuding the notion of natural liberty of much of its force. Natural liberty had to be presented as a counterweight to the oppression of the state. And if it was successfully thus presented the more enlightened monarchs might just be persuaded that their own wealth would rise more if they let the economy secede from the state.

Once this hostility to the state found its way into the bedrock of economics it stayed there. Moreover this anti-government perspective, that colored all subsequent economic theorizing, attracted to it analysts who were like minded. We thus find a positive feedback between the anti-state foundations of economics and those who then carry the theory forward.

In contemporary terms this has profound consequences. One of which, as I mentioned at the beginning, is that standard economists are openly and brazenly opposed to democracy.

Why?

Because, apparently unbeknownst to economists, the social and political milieu within which the economy sits, has undergone radical change since the 1700’s. We nowadays have far fewer autocratic monarchs prone to meddling in popular affairs, and significantly more democracies where the people who are the erstwhile agents of the economy are also the agents  of self-government. Regular people, unlike economists, admit of more than one social domain. They operate in many all at once. The notion that we the people actually govern ourselves has been born and adopted around the world. But it hasn’t seeped into economic theory, where the government is resolutely presented as a hostile and incompetent force just as it was two hundred or more years ago.

So when we the people want to raise taxes to pay for our retirement and to establish a collective to help administer that retirement, this act of communal spirit is seen within the walls of economics as an infringement on natural liberty. Standard economics has no other way of viewing it. It is a monotone discipline in a multicolored world.

And in such a monotone world, where the people act only in their self-interested economic way, there is no space for government. Were we to bring the government into standard economic theory as a fully fledged partner we would have to modify that theory to such a degree that it would be easier to toss it out and start again. For one thing we would have to theorize afresh about human motivations and the distressing, to economists, habit people have of being able to hold contradictory thoughts and not burst into flames as a consequence.

In the end, I suppose, the fact that standard economics is caught up in its 1700’s roots is both quaint and annoying. It is quaint because it gives us an insight into the big issues of those long ago years. It is an artifact of history akin to the battle of Waterloo and allows astute historians to look at what intelligent people thought back then. It is annoying because all our social progress during the interim is apparently of no interest to standard economists. They want to live in the past and thus impose the past on the present whenever they offer us all advice.

Which is a pity because I think the ongoing fight for equality and democracy is just as important, if not more so, that the preceding fight to establish the notion of natural liberty. Whatever that is.

 

Acknowledgement:

I found all those quotes above in Steve Medema’s essay “The Economic Role of Government in the History of Economic Thought” which is a chapter in Samuels, Biddle, and Davis “A companion to The History of Economic Thought”. If I mis-typed them, that’s my fault!

 

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