Vitor Gaspar

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?