New School Economic Review

The Mainstream is Back; with prejudice

by Benjamin on January 24, 2010

Ghostbusters meets Leviathan

If you saw the front page of the economist this week you might quickly conclude that the Washington Consensus and Neo-Classical economics is back in the ascendancy. “STOP!” shouts the front page, “The backlash against big government” and a suitably Leviathan-cum-Ghostbuster’s-Slimer picture swallowing the poor citizen follows. That the poor citizen looks like a suited and booted businessman is probably a freudian slip, but the image tells the story. Let business get on with its work and start cutting back on the government.

For the first time, to my memory, the front page leader runs onto the second page, and the reason is simple. The Economist is confused. It wants to encourage us to cut back on the government, limit its impact but it also wants us to support banks being propped up, government stimulus packages and systems of governance by that same government (a lesson of Haiti if not the global recession).  So why is the Economist promoting and opposing ‘big’ government in the same editorial?

Their problem is one of prejudice, of ideology. Don’t take my words for it, the Economist is refreshingly open in stating the ideology to which it clings after reality has illustrated the problems with lack of government intervention in market places:

In these circumstances, hard rules make little sense. But prejudices are still useful – and this newspapers prejudice is to look for ways to make the state smaller. That is partly for philosophical reasons: we prefer to give power to individuals, rather than governments. But pragmatism also comes into it. (Economist Jan 23: Leader p. 9)

They can’t be serious! They oppose government on the philosophical grounds that individuals need to be empowered and protected from big scary states. So much for empirical evidence. Surely, if there’s anything the last 12 months have shown us it is that the individual is not under threat from the state as the leviathan in the 21st century. Yes in the 17th century when Hobbes wrote his book the state was all powerful (Think Cromwell). And if we talk of Myanmar or such states then yes sure. But in today’s market economy the label of Leviathan should be applied to those enitites ‘too big to fail’ – companies.

Hobbes's 1652 Leviathan was the government. Ours may be the firm

Banks have been given a bad reputation these last months, but for good reason. Oil, media, pharma, cigarettes, software – all of these industries have their monopolists and their scare stories. Aren’t they the 21st century  leviathan? What governments try to do is to support both companies and individual citizens. Where the company is responsible to the shareholder, the government is responsible to the electorate – sort of. The pragmatism refered to by the Economist is their fear of government mandarins directing private activity. A fair concern, but is that any more fair than worrying about the lobbying and advertising campaigns of monopolies and oligopolies? Too quickly will we forget what has happened in the last year, and move back to a trajectory of prejudice and ideology without understanding the economy or its features.

I wish that the academic economic community would be as open as the economist in declaring its inherent biases or perhaps investigating them. Yes, David Colander and others talked about how we should change the way we teach economics as a result of the crisis at this year’s AEA meeting, but he’s been saying that for a while and I don’t think anyone will change their ways. Sad.

A lot of talk of change… where’s the action?

by Benjamin on August 16, 2009

How bad are things when economists are writing the Queen of Britain first to explain why they were wrong, and now to say that the economists who admitted they were wrong, were also wrong… The queen herself asked questions of the profession and its failure to see the crisis coming as far back as July 2008, and what did ‘we’ have to offer as an answer?

Everyone seemed to be doing their own job properly on its own merit. And according to standard measures of success, they were often doing it well. The failure was to see how collectively this added up to a series of interconnected imbalances over which no single authority had jurisdiction. This, combined with the psychology of herding and the mantra of financial and policy gurus, lead to a dangerous recipe. Individual risks may rightly have been viewed as small, but the risk to the system as a whole was vast.

For anyone whose even opened one of the Minsky books or even a bit of Taleb this will be familiar territory – even the description of the market. But lets leave that aside. The retort from a new group of economist is that the education of economists, on all educational levels, is insufficient, as it lacks institutional, historical and sociological context. So far so good. What can we do to help the situation:

Models and techniques are important. But given the complexity of the global economy, what is needed is a broader range of models and techniques governed by a far greater respect for substance, and much more attention to historical, institutional, psychological and other highly relevant factors.

Skidelsky himself wrote something similar, and very interesting in the FT a couple of days ago [cached by google here], but here’s an obvious question… What action is taken beyond talk??? The latest instalment of the American Economic Review seems to almost not have noticed any change, and frankly why should it? There’s a year long back-log and it doesn’t look like a revolution is about to happen wit hthe foundations of the discipline. Especially when the ‘official’ reply from the discipline seems unable to step aside from models which cannot include a crisis in its analysis (cf. Robert Lucas’s reply) and the ‘dissenters’ who want do not want to change the discipline but would like a ‘broader range’ of models… It’s a long road ahead I fear.

Chicago and Macro goes the way of the Dodo

by Benjamin on June 18, 2009

Alright then, has everyone now heard the argument that more debt funded government spending will crowd out an equal and opposite private investment or consumption? I’m sure it sounds familiar, because there is something about that story, especially as it is sold by Chicago’s Eugene Fama and John Cochrane very recently.

The story excludes the current circumstance of the economy (recession), it assumes – in its classic form – that the economy is not credit driven, and as Paul Krugman complains: “What’s so mind-boggling about this is that it commits one of the most basic fallacies in economics — interpreting an accounting identity as a behavioral relationship”. In fairness Krugman is only responding to Brad DeLong who goes a little further in lambasting the Chicago guys:

Milton Friedman knew this. Irving Fisher knew this. Simon Newcomb knew this. David Hume knew this. John Cochrane does not know this: does not know that the velocity of circulation is an economic variable rather than a technological constant. I do want to pound my head against the wall. I do not know what else to do…

Continue Reading…

Toxic Economic Textbooks

by Benjamin on May 19, 2009

The Post Autistic Economic Review – now known under the uninspiring sobriquet Real World Economic Review – is pushing a new movement against the problems of traditional textbooks in economics – Toxic Textbooks – saying they are to blame for the recent problems amongst other things.

The current economic meltdown is not the result of natural causes or human conspiracy, but because society at all levels became infected with false beliefs regarding the nature of economic reality. And the primary sources of this infection are the “neoclassical” or “mainstream” textbooks long used in introductory economics courses in universities throughout the world.

This is not a new complaint, in fact it’s been around a while, but the language has certainly gotten a lot stronger in this call for student action. Textbooks are however here to stay so this also requires academics to write ‘good’ textbooks, which is a challenge, which would avoid the problems outlined in the Toxic Textbook Manifesto.

Every year these “mainstream” books serve to indoctrinate millions of students in a quaint ideology (perfect rationality of economic agents, market efficiency, the invisible hand, etc.) cunningly disguised as science. This mass miseducation deprives society of the moral and intellectual capacities it needs in order to design and maintain the support systems required by market economies.

Don’t blame the economists for the crisis…

by Benjamin on May 1, 2009

Noted by Stephen Kinsella, Barry Eichengreen just published a long list of points arguing that the economy came undone through the action of bankers, bad theory, institutional biases, business schools, misunderstanding the markets and so forth…  But one group of people are not to blame: the economists… no no, says Eichengreen, blame the users of economic theory:

the problem was a partial and blinkered reading of that literature. The consumers of economic theory, not surprisingly, tended to pick and choose those elements of that rich literature that best supported their self-serving actions.

Don't point the finger at economists... We pointed it at you first

The economists were good people who tried to model behaviour, risk, incentives and agent behaviour, all of which was useful. “What got us into this mess, in other words, were not the limits of scholarly imagination” it was those fools who used our work. If any complaint should be laid at the door of economists, we might say that

Equally reprehensibly, the producers of that theory, benefiting in ways both pecuniary and psychic, showed disturbingly little tendency to object.

We built it in good faith, and failed to protest how it was later implemented… You know, Guns don’t kill people, apes with guns kill people – so don’t blame the good and honest gun maker. This all echoes today’s  BBC coverage and British Parliament blaming bankers (and users of economic theory) for making an “Astonishing mess” of the economy…

Can we be honest and say that standard economic theory has not really tried to deal with the economy over the last many years, and that is where the problem started? (If we were paying attention to the economy, we might have noticed some of those policies…) The problem is not with the user, who can only use what is given to them, but with the producers of thousands upon thousands of pages re-affirming the veracity of  Value at Risk models, stable monetary regimes with long run equilibria and econometric sophistry showing the emergence of the Great Moderation, a new ‘plateu of economic stability’ (as Fischer infamously called the U.S. economy two weeks before the great 1929 crash…)

Eichengreen himself is more diplomatic about it. Even though he doesn’t want to lay the problem at the feet of the economics profession, his final paragraphs which aim to look forward, inevitably needs to discard the economics professions approach in the late 20th century. What we have been doing was too unrealistic and too ‘malleable’ – meaning always returning to a stable fictional equilibrium – and it needs to make space for empirically grounded models which use history and institutions, while economics begins to weed out the purely abstract thinking.

The late twentieth century was the heyday of deductive economics. Talented and facile theorists set the intellectual agenda. Their very facility enabled them to build models with virtually any implication, which meant that policy makers could pick and choose at their convenience. Theory turned out to be too malleable, in other words, to provide reliable guidance for policy.

In contrast, the twenty-first century will be the age of inductive economics, when empiricists hold sway and advice is grounded in concrete observation of markets and their inhabitants. Work in economics, including the abstract model building in which theorists engage, will be guided more powerfully by this real-world observation. It is about time.

About time indeed, and maybe in ten years he will write it in unequivocal terms.