Haldane

I know.

I’ve been unfair.  Economists are not all totally irrelevant.  Nor is economics a complete wasteland of ridiculous models designed to make economists look clever at doing math. I hope I haven’t given that impression.

Well only a little.

You can’t make out-of-date ideas and concepts up-to-date and flashy simply by making them formal.  All you do is dress up the old and pretend it has continuing value.  A new coat of paint does not cure the dry rot.

Economists are obsessed over new coats of paint.

Perhaps the problem is that lacking any big new ideas there is a temptation to spend too much time on re-hashing the older ideas.  Then there is the even greater temptation to delve more deeply into self-reflection and ask ever less interesting questions in ll;.ieu of spending more time on the big issues.

To extend my metaphor: economists appear to enjoy discussing how to hold the paintbrush and spend inordinate time on the finer points of paint chemistry rather than tackling things like growth and inequality that have eluded them when they dared to think big.

Is it because things like growth and inequality require an inter-disciplinary approach?  

When economics narrowed itself and became the study of the allocation of scarce resources against a less scarce set of requirements it surrendered centrality in the discussion of those big questions.  They are not simply questions of allocation.  They are also social, political, ideological, and historical questions.  The problem for the reduced ambition that modern economics took on for itself was that those other influences still lingered in the background no matter how disciplined economists became in ignoring them.  Or in trying to ignore them.  Any economics that pretends that, as an example, power is irrelevant to the allocation of scarce resources is fooling itself.  It is deliberately making itself useless.  The insights might be wonderfully logical.  The mathematics might be the very essence of elegance.  But the relevance is diminished.  Often times to the point of irrelevance.

This has not stopped economists from popping up everywhere and claiming dominance over intellectual territory far beyond the domain of pure allocation.  They imagine that their method can be applied all over the place.  After all, they proclaim, they have conquered the art of efficient allocation.  Why not recapitulate every problem as one of allocation and conquer those too?

Except their triumph was made at the expense of reality.  And that matters.

We all know that this critique is correct.  Why else did economics re-imagine the larger questions through the limited lens of “micro foundations”?  It gave up thinking big.  It became so reductive that everything could be presented simply as a pile of little things.  There was no structure beyond that of the smallest element.  And that smallest element was all we needed to understand.   Because we could.  Or thought we could.  It was as if our understanding of the planets was an aggregation of our understanding of atoms.  There were no issues of interest beyond the small.  There cannot have been a bigger surrender of intellectual relevance or ambition than the inward turn implied by the micro foundations error.  This is why so many economists nowadays appear to be no more than statisticians manipulating large data sets and exploring new methods to apply to large data sets.  That sounds interesting.  But is it economics?

Yet economists still opine and portray themselves as experts on the bigger questions.  The recent bout of inflation brought them out in droves.  It became apparent quickly that there was no single perspective.  Had the public truly engaged with the economists it most likely would have walked away in confusion, and with a sense that economics has a long way to go before it can be relied on.  

The impression created by the endless public disagreements between well known economists is that economics is nothing much more than educated guesswork.  Its allocative focus disallows it from having insights into larger questions beyond those of any well briefed and educated person.  Yes it has its own jargon.  It has its own collection of approaches.  It has clever insights.  And it has, within its own world, an imperious sense of its own correctness.  But it has failed completely to grapple with its nemesis: the enormous and ever growing complexity of its core subject matter.  

Which is odd because at the beginning economics was proud to delve into the rising power and complexity of modern economies.  That’s what attracted people to study economies in the first place.  Economies were changing.  They were growing.  The issues thrown up by this change and growth were inherently absorbing and had an urgency associated with them.  There was great social value to be had in exploring the ramifications of the modernizing industrial world.  

But there was also a tension that ultimately led us to today’s irrelevance.  That was the tension between an urge to be “scientific” in the manner the hard sciences were developing, and an urge to maintain contact with the political and social consequences of modernity.  Economics attempted, at first, to keep a foot in both camps.  Ultimately, though, it had to choose.  It chose method, logic, and pseudo science.  It took on the appearance of objectivity despite its subject matter’s inherent subjectivity.  This gave rise to all sorts of references to “natural” phenomena. Natural rates of this and that popped up as if there were immutable laws governing social relations.  The two biggest movements in this direction were the so-called marginal revolution and the conception of general equilibrium.  Both are so hard wired into economics now that it is difficult to untangle them.  Yet both are artifacts of context and historical positioning.  They present a scientific worldview.   They exist on false foundations.  They are analytical crutches rather than real world artifacts in need to explication.  

General equilibrium in particular was useful because it implied that economies were essentially “Newtonian” and not subject to the complexities revealed by more modern physics.  Economics could, after all, be reduced to the study of static allocation.  There was no need to build a new foundation.  

And so economics continued on the trajectory we observe today.  It was inevitable.  As economies became more complex and richly interconnected, economics became more and more intensely focused on simplicity and reductive analysis in order to avoid embracing the need for a new method to engage with complexity.

The result was a surrender.  Macro economics rose and fell within a generation or two.  A bold effort to grapple with the big issues at a level that acknowledged the emergence of structure not explained by small scale thinking.  It failed primarily because it was essentially a return to political economy and the core of economics had been captured by the pseudo science of allocative logic.  

And then, of course, after World War Two economics became subject, as many things were, to the context of the geopolitics of the time.  America came to dominate western economics and those economists who claimed the most fame were those most amenable to the American side in that geopolitical struggle.  In a sense this influence took economics back to its origins as political economy, only now it was political economy dressed up without the politics being overt.  The scientific gloss hid the underlying ideology.  Which gave economics credibility and an ability to avoid reform even while economies accelerated in complexity and ran beyond their industrial roots and began their movement into a service and digital re-conception.  The gap between economics and real economies widened.  Irrelevance beckoned.

This is not new.  Nor is it unique.  

Just this week, as the professional classes bemoan the state of the world and the problems associated with slowing growth, persistent inflation, and what appears to be rotten geopolitics, we get a steady diet of references to the problems facing economics.

Martin Wolf’s reference in today’s Financial Times is, perhaps inadvertent.  He says:

“Marked declines in growth of real GDP per head have occurred across the world since the early years of this century.  The collapse in growth of “total factor productivity” — the best measure of productivity — has been particularly significant.”

Total factor productivity is a fancy name given to the ignorance that was discovered by Robert Solow back in the 1950s when he began theorizing about growth based upon the 1800s concepts of “labor” and “capital”.  Oddly, for economists, when they use two horribly vague notions — labor and capital in this case — they get horribly awful output from their models no matter how cleverly constructed those models are.  This discovery, one of the most important of that era, ought to have inspired a re-invention of economic inputs.  But rather than undertake that arduous task, economists simply re-branded their ignorance and gave it a fancy name.  Ignorance became Total Factor Productivity.  And here we are with a gnarled expert such as Martin Wolf commenting on its decline as if it was something that actually existed.  

It doesn’t.  It is a fog of underlying artifacts waiting to be revealed and then theorized in a modern way.  

Then there’s Jed Kolko, lately of government service, writing a long article outlining the agenda for economic research that he would have found useful in his policy-making role.  He says this:

“And having now seen this from the other side, more as a consumer than a producer of research, I can tell you that most academic research isn’t helpful for programmatic policymaking — and isn’t designed to be. I can, of course, only speak to the policy areas I worked on at Commerce, but I believe many policymakers would benefit enormously from research that addressed today’s most pressing policy problems.

But the structure of academia just isn’t set up to produce the kind of research many policymakers need. Instead, top academic journal editors and tenure committees reward research that pushes the boundaries of the discipline and makes new theoretical or empirical contributions. And most academic papers presume familiarity with the relevant academic literature, making it difficult for anyone outside of academia to make the best possible use of them.”

That’s a good encapsulation of my criticism:  economics has become, primarily, an academic pursuit designed not to tackle actual economic problems but to contribute to the development of economics itself and to create opportunities for career advancement for economists within the confines of academic economics.  It has, to channel Steve Levitt, become entirely self-regarding and self-respecting.  It values method over real world application and useful knowledge.  

Lastly, there’s another effort in the Financial Times.  This time yesterday by Andy Haldane who was, as you know, chief economist of the Bank of England.  His article concerns the “performance art” that forecasting has become for central bankers.  There is no way to gloss over the fact that forecasting in economics is an illusory pursuit sitting atop a Rube Goldberg structure of models each of which totters further from reality than that immediately below it.  Reading the output of this mess and making sense of it is more art than science.  It sounds profound dressed as it is in arcane jargon and addressed as it is to a small and knowledgeable audience all educated within the safety of the guild that has become modern economics.  He concludes thus:

“John Kenneth Galbraith famously said economics was extremely useful — as a method of employment for economists.  The same could be said of inflation forecasts and central bankers.  For all Bernanke’s sound analysis, forecasting is likely to remain interpretive dance — always mysterious, occasionally enlightening, a show without much tell.”

The relevance of that dance is, as the saying goes, in the eye of the beholder.  

The fall from grace of modern economics can be traced to a long series of bad decisions.  Its embrace of concepts that are not artifacts in the real world but are useful in modeling, led it down the road to irrelevance.  Its deliberate separation from the social origins of actual economies and their embedding in political and social reality allowed it to delve into what it imagined were natural laws, but which have little real world presence.  And its capitulation in the face of ever rising complexity — rather than embracing it — implied an ever growing gap between the simplicity needed to support its methods and the reality it purported to comment upon.  

And so we end up back with Steve Levitt and his critique.  Economics is fast becoming outdated, inward facing, and this irrelevant.  As Haldane witheringly concludes: “a show without much tell.”

I hope it recovers.