Economics

Economists? That’ll be your problem right there

Last Wednesday Suzanne Moore posted a Guardian comment piece entitled Why do we take economists so seriously? which takes a rather scatter-gun approach to some familiar themes. The argument, in outline, is that the economy is in a mess and this is primarily because we have been hoodwinked by orthodox economists. These economists produce inadequate theories unsuited to understanding society. But we nonetheless invest them with too much power over it, and us. The range of opinions on how to resolve the current crisis is too narrow and largely reflects the interests of those who support the current social order. New voices are needed. As Moore argues:

we are indeed in reduced circumstances when debate is reduced to bankers arguing with economists. This clash of ideologies is not really left versus right. It is more akin to fundamentalists talking to agnostics …

This is what you get from this dictatorship of economists, and it should be overthrown. It is wrong and keeps being wrong. The choices to be made now are moral, not economic ones. Only an idiot or an economist would think otherwise.

For a piece in which the author professes to be largely ignorant of the matters about which she is writing, this is quite a brave stance. Predictably it has generated a response.

In a post that garnered considerable support from tweeting economists, the estimable Chris Dillow highlights Moore’s failure to grasp the way economic thinking is evolving and the richness of current economic research. Moore argues that:

Economics is not a science; it’s not even a social science. It is an antisocial theory. It assumes behaviour is rational. It cannot calculate for contradiction, culture, altruism, fear, greed, love or humanity at all.

Regardless of whether this qualifies as an accurate characterisation of economics at some point in its history, Dillow points out that these are issues about which current economic research is very much aware.

Over at The Lay Scientist Michael Story notes that the sort of criticism Moore offers is not uncommon:

I get the general idea … economists are either foaming free-market fundamentalists or mindless automatons, sitting uncaring in their lairs, crunching numbers and models that have increasingly little relevance to the real world.

Story’s post tries to balance a recognition of the valid points in Moore’s piece (the problems associated with complex synthetic financial products and regulatory weaknesses) with the broader point that such anti-economics sentiment, though widespread, is misplaced. Here again Story argues that economics is a richer body of thought than Moore credits and is already tackling – in its own way – the purported inadequacies that Moore identifies.

I find myself somewhere between these positions. Moore’s argument is a monumental, and rather confused, generalisation. Yet, it is hardly news that economics finds itself in the dock over the 2007-08 financial crisis and its fallout. And so it should be. Perhaps the most high profile examination so far was the film Inside Job, which raised important questions about the ethics of economics and (some) economists. Prominent members of the discipline have been forthright in their condemnation of the failings of contemporary macro (as discussed here and here). There is no credibility in the argument that economists are not – even partially – culpable for the problems we now face. And I would not be entirely optimistic about the discipline’s capacity to deal successfully with its own deficiencies.

But which “economics”?

One of the problems with this discussion is the term “economics”. It is used almost indiscriminately. Often several significantly different meanings can be in play at the same time.

“Economics” can refer to what is actually happening out there. That is, in the portion of the social world we label “the economy”. Where business is conducted. Trade occurs. Needs are met or go unfulfilled. Fortunes are gained and lost.

Or it can refer to the sort of economic arguments and understandings that circulate in public discourse – in the papers and the pubs – which was discussed a decade or so ago under the heading “ersatz economics”. This bears no necessary relationship to “proper” economics.

Or it can refer to the “proper” economics associated with the academic discipline that carries the name. Even here we can differentiate between the economics encountered in the textbooks – the sort that those who have studied economics are familiar with – and state of the art in economic research, much of which is utterly impenetrable to outsiders.

Then, finally, it could be the economics that is influential in policy circles. This is often a radical simplification of economic thought, in part because that is what is digestible to non-economists. There is, for example, a strand of free market zealotry, often peddled by the libertarian component of the Think Tank industry, which could no doubt win prizes for sticking faithfully to the simple nostrums preached by Chicago price theory in its pomp. But it bears almost no relation to the more qualified appreciation of what markets can deliver that characterises much subsequent and contemporary “proper” economic thought. Many economists recognise the limits to what markets can achieve or the contingencies underpinning market success. But they aren’t the ones relentlessly pushing free market ideas into the policy process. Or bending the Minister’s ear about the indisputable benefits of marketising everything that is as yet untouched by the market’s cold embrace.

As for the economic ideas propounded by politicians with no formal training or appreciation of the field, radical simplifications would be the best that could be said for them.

Of course, it isn’t just Think Tanks who act as policy entrepreneurs for marketization. Inside Job illustrated the role that some economists have played in moving out of the academy and into the policy arena. A more detailed discussion of these moves has been provided by Donald Mackenzie in his work on the way in which economists such as Friedman, Black and Scholes played a role in acting on the world to transform it to better accord with their vision of how it should be ordered.

The disaster of Long Term Capital Management should perhaps have alerted us to the risks of these types of intervention. But clearly the financial markets, financial theorists, and financial regulators weren’t paying close attention. So when Andrew Haldane argued this week that new models of financial markets are necessary he is right. But the point should have been obvious for quite a while.

When we argue that economists are to blame for the mess we’re in, what exactly are we referring to? Which flavour of “economics” are we objecting to?

When “proper” economists move into the policy world and start to advocate for putting their theories into practice, what status does that activity have? Standard economics lays great emphasis upon the positive/normative distinction. The “science” of economics is the positive analysis of the world as it is. It has an aversion to normative claims. So when economists start lobbying policy makers for change because this or that theory says the world would be a better place if it were remoulded to conform more closely to the theory, is that even “economics”? Or is it something else entirely?

Economics: somewhat less benighted

If we restrict ourselves for a moment to “proper” economics the picture is, as Dillow and Story point out, more complex than Moore appreciates.

Economics is a global discipline which covers a range of perspectives. So to talk of “economics” as a unified body of thought is wrong-headed. But, at the same time, it is a discipline in which there is a strong orthodoxy, a reasonably clear global hierarchy, and a heterodox periphery. It is a more unified body of thought than any other science of society.

The received wisdom is that heterodox economists struggle to be heard and largely participate in conversations parallel to the mainstream. These are not the people who shape the economic canon. Yet, there are signs that this may be changing slowly. The World Economics Association – which was launched last year year by those unhappy with the perceived hegemony of orthodox approaches – is now the second biggest membership organisation in the field. Among heterodox economists a range of ontologies are deployed, many of them explicitly reject then sort of asocial models of the individual that Moore rails against.

But it wouldn’t be right to look entirely to the dissidents to remake the discipline in a new image. Indeed, some heterodox economists operate with a somewhat caricatured – or, perhaps more accurately, outdated – understanding of what the mainstream is up to. For example, while rational choice approaches undoubtedly continue to dominate microeconomics, there is plenty going on under the heading of behavioural economics that moves the discipline away from simplistic models of narrowly defined and clear-eyed preference satisfaction. Some of the most interesting papers being produced at the moment are trying to wrestle with precisely the sort of qualitative, emotional or “non-rational” factors shaping behaviour that Moore identifies. The idea of bounded rationality is now commonplace, although frequently not used in the way that Simon intended. Equally, there is an explosion of interest in breaking away from atomistic conceptions of decision making to recognise a range of interaction effects – reference levels and relativities, peer groups, neighbourhood effects, herding and the like. This opens up possibilities for multiple equilibria, path dependency and all sorts of sub-optimal outcomes. Many of these developments therefore have the potential to transform our understanding of the welfare implications of market allocation mechanisms. Once you place “individual failure” alongside market failure and government failure the world starts to look rather different.

Whether such moves ultimately lead to the transformation of the discipline remains an open question. In part this is because the implications of these ideas have yet to be worked through fully. But they also pose a threat. Some of these developments in economics are deeply uncongenial to those who hold to a conservative, free market ideology. You only have to look at the critical – at some times rather rabid – response to Sunstein and Thaler’s libertarian paternalism or Robert Frank’s arguments about income relativities and status effects to appreciate this.

Yet, while mainstream economics now tolerates ideas that would have been ruled out of court a few years ago, there remain significant blind spots. For example, macroeconomics seems in thrall to market-clearing models that are not fit for purpose. The challenge is to change the path that theory has been pursuing for the last couple of decades. You would have thought that the spectacular failures to anticipate the global financial crisis would lead to a major rethink. While some prominent economists have called for this, it is by no means certain it will follow. It could be argued that the discipline has become locked into a sub-optimal developmental path by its incentive structure, but that is an argument for a different day.

Standing back

We are going through a period of exploration and innovation in economics, but significant ontological issues remain largely unexamined. Ontological issues are at the heart of much that separates the social science disciplines and schools of thought within a discipline. But economists don’t tend to do philosophy. At a push they might venture into methodology. But rarely do you encounter explicit ontological or epistemological reflection.

This is unfortunate because it can act as a brake on change and progress.

We can contrast this with previous eras in which such philosophical reflection was a legitimate part of economic discourse. I was reminded of this last week during a Twitter discussion in which someone mentioned the Cambridge Capital Controversy. There was a time when puzzling over what precisely “aggregate capital” might refer to, and the dangers of the fallacy of composition, was a pressing issue at the centre of economic debate. It wasn’t banished to some darkened corner where economic methodologists gather. Hard to imagine today.

One of the most obvious contemporary illustrations of this is the way in which economics treats uncertainty. We might think that recent events have rendered rational expectations approaches even more questionable than they were previously. But where next? Mainstream approaches tend to transform uncertainty into risk, albeit with a growing acceptance that risks in some markets may be fat-tailed rather than normally distributed (as discussed in the Haldane paper on financial markets cited above). Post-Keynesians, on the other hand, argue that genuine uncertainty cannot meaningfully be “tamed” by translating it into risk. Action in the face of radical uncertainty has to be starting point of analysis, it cannot be abstracted away, even as a first step. Recent debates have disinterred the Keynesian concept of “animal spirits” in a bid to understand what is happening on the capital markets. But few have fully taken on board the implications of embracing caprice among market actors. Deep Keynesians like Shackle would argue that radical uncertainty transforms the methodology of economics and renders much of the formalism of orthodox economics beside the point, a position shared by many Austrian economists.

And that is the reason why such ideas do not gain much traction. Logical consistency, parsimony and tractability are valued. Highly-prized formal methods are privileged over a plausible ontology.

Constructive critique

I welcome Suzanne Moore’s post. Not for the force of its argument but because, by inviting a response, it helps to sharpen the counter-arguments. It hints at some genuinely important questions not just about economic analysis but about the role that economic ideas play in the policy process. But it is not a very effective critique of those ideas. If anyone is interested in examining the current state of economic knowledge in a rather more informed and balanced way then I’d suggest starting with Roger Backhouse’s excellent short book from a couple of years ago.

Image: © treenabeena – Fotolia.com

 

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