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Dr Smith and the “neoclassicals”

admin / June 15, 2013 / Economics / Permalink

Debates over the demarcation of different schools of economic thought are by no means new. Taxonomic disputes break out sporadically. Whether “mainstream”, “orthodox” and “neoclassical” economics ever have been, are, or could be synonymous is a question that has exercised several authors of a philosophical turn of mind. Lately the econ blogosphere has turned to the issue, with the focus on the identity and identification of neoclassical economics. Noah Smith made an intervention on the issue a couple of days ago.

Smith notes that the characteristics commonly associated with neoclassical economics, as defined by Wikipedia, look like this:

Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by cost-constrained firms employing available information and factors of production, in accordance with rational choice theory.

But, Smith argues, there are plenty of papers appearing in prestigious economics journals that don’t have all – or, in some cases, any – of these characteristics. There are authors who have written papers clearly in the spirit of neoclassical micro, but have also written papers without such characteristics. Is it sensible for such authors, having sinned once, to be forever labelled “neoclassical” by their critics? Continue Reading →

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Reengineering the market for criminal legal aid

admin / June 4, 2013 / Economics / Permalink

The Ministry of Justice consultation Transforming Legal Aid closes today. At the last minute I decided to submit something reflecting on the economics of the proposals.

You can find the substance of what I wrote on my page at Scribd.com. It can be accessed below the fold.

Continue Reading →

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Rebalancing towards renting

admin / April 26, 2013 / Economics, Housing / Permalink

One of the central conclusions drawn from the Global Financial Crisis was that the UK economy was too dependent on financial services and unproductive investment in the property market rather than the real economy. So the economy needs rebalancing.

One of the main issues facing the housing market is that households overwhelmingly aspire to owner occupation, even as the chances of accessing the tenure become increasingly limited. House prices that seem to defy gravity, stagnating incomes, and difficulties in meeting deposit requirements mean that thousands of households have to reconcile themselves to renting privately for the long term. That the whole system is a mess hardly needs saying.

Is addressing the broader economic rebalancing agenda compatible with addressing the dysfunctional housing market? Is it possible to rebalance the economy without persuading households to spend less on housing and invest elsewhere instead? Even framing the question like this implies that households have a choice over incurring large housing costs, which of course is not the case for many people.

Unravelling the dependence of the UK economy on financial services and property investment is no easy matter. It took many years to back ourselves quite so tightly into this corner. How is policy handling the complexities of the agenda?

On the housing side we could argue that things are not going hugely well. Efforts to increase housing supply directly are modest, while efforts to increase supply indirectly by assisting with housing costs – notably the Help to Buy scheme – have been widely condemned as wrong-headed. On the economic side, the government has clearly made some efforts in the direction of rebalancing both sectorally and regionally, but these are initiatives that are going to take years to have serious impacts on the productive capacity of the economy. Whether the government is pursuing the rebalancing agenda with sufficient vigour is debatable.

That brings me to a curiosity. Continue Reading →

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Reinhart and Rogoff: replication and responsibility

admin / April 18, 2013 / Economics / Permalink

… the actions of economists today bear on the life chances of the world’s population far more substantially than do the actions of the members of most other professions.

George DeMartino

Replication is an activity that doesn’t attract enough attention, enough credit, or enough effort in the social sciences. But it is an activity that is getting a lot of attention at this precise moment. This has come courtesy of the exposure of both flaws and contestable methodological choices in Reinhart and Rogoff’s landmark study of public debt and economic growth.

The economic blogosphere has exploded with debate over the issue. But, just in case you’re not following it, here are the key points. Reinhart and Rogoff followed up their major historical work looking at debt and economic growth This time is different with a paper called Growth in a time of debt published in the American Economic Review in 2010. Their key result is that levels of public debt in excess of 90% of GDP are associated with lower rates of economic growth. Indeed, the mean annual growth rate they report, once debt crosses the 90% threshold, is negative.

This body of work is highly influential.

A quick search on Google Scholar will tell you that the NBER version of Growth in a time of debt has been cited 450 times, while This time is different has been cited over 2000 times since 2009. That is a lot of citations for social science publications: you’re doing pretty well once citations for a piece get into double figures within four years.

In a paper published this week, Thomas Herndon, Michael Ash, and Robert Pollin (HAP) of the University of Massachusetts, Amherst identify problems with the Reinhart and Rogoff result. Continue Reading →

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Is a little economics dangerous?

admin / April 2, 2013 / Economics / Permalink

A few weeks ago I had a brief exchange on Twitter with @unlearningecon about the possibility of introductory economics instruction going beyond teaching the neoclassical model of perfect competition and exploring alternatives. If I remember correctly our exchange didn’t get much beyond me saying that to do so is quite a challenge. Students can find it difficult enough to grasp the standard model, let alone alternatives to it. The challenge is compounded because some of the alternatives, at micro-level at least, are not as well worked through as the standard model. @unlearningecon didn’t feel it was so difficult.

Of course, I’ve no idea upon what @unlearningecon is basing his/her view. Our exchange was no more extensive than that. We didn’t pursue the issue. The view might be underpinned by plenty of experience. All I can say is that, in that case, the experience is different from mine.

For quite a while I have been thinking about what students should be introduced to when they are introduced to economics. The issue has become somewhat more high profile following the global financial crisis and the questioning of established economic paradigms. Continue Reading →

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Help to Buy?

admin / March 20, 2013 / Economics, Housing, Politics / Permalink

The objections to George Osborne’s latest wheeze to assist the housing market are hardly worth discussing. They are almost too obvious. And they have been rehearsed at length in relation to similar, smaller scale initiatives that have already been tried.

The new “Help to Buy” scheme, announced in today’s Budget, aims to provide equity loans of up to 20% of the value of new properties worth less than £600,000. Households have to come up with a 5% deposit to participate. The Chancellor is proposing that the scheme be backed up with government guarantees sufficient to support £130 billion of mortgages. The guarantee scheme will start in 2014 for a period of three years.

Just about the only perspective from which this initiative makes sense is carrying through on an absolute determination not to add directly to the public sector deficit, but not minding too much if the guarantees get lost amongst everything else in the public debt.

So it probably makes perfect sense to the Treasury.

Otherwise, the scheme has almost nothing to commend it. The economic illiteracy it displays is remarkable. The fact that, coming from the current occupant of No 11, this is no great surprise is perhaps equally remarkable. Continue Reading →

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Economical with the truth?

admin / March 9, 2013 / Economics, Politics / Permalink

The agenda for this year’s Liberal Democrat Spring Conference carries the strapline Stronger economy, Fairer society. Given the parlous state of UK plc, and the deeply inequitable impacts of the Coalition austerity policy, the strapline touches on two of the biggest issues of the day. So the unwary among us might think that the discussion would have the economy somewhere near the top of the agenda.

Nothing could be further from the truth. In fact, the cynic might suggest there was strong circumstantial evidence to the contrary. The party leadership is doing as much as it can to avoid giving an airing to the issue of the direction of economic policy.

First, Vince Cable has not been given the opportunity to speak to Conference as a whole. Instead, he found himself on a less high profile platform: speaking to a Friday evening fringe meeting organised by the Social Liberal Forum. The meeting nonetheless attracted an audience of a couple of hundred delegates. Continue Reading →

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On the horsemeat scandal

admin / February 17, 2013 / Economics, Politics / Permalink

The horsemeat scandal has now been with us for over a month. It has morphed from a localised concern about adulteration of one processed meat product at one supermarket chain into a Europe-wide exposé of industrialised food production and lengthy supply chains that are ripe for abuse.

Many people are outraged. But what sort of a scandal is it? That’s harder to pin down. There is rightly much concern about the mislabelling of food products. You’d expect that when you buy food it is accurately described. That is the foundation of a food production system which relies, in theory at least, on informed consumer choice. And behind that concern for mislabelling someone is being swindled when cheaper horsemeat is being passed off as more expensive beef.

But it is hard to think that people not realising exactly what they are eating can, in itself, account for the degree of popular concern we’re experiencing. Continue Reading →

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Name a book that changed your life

admin / February 4, 2013 / Economics, Other gubbins / Permalink

Earlier this evening Umair Haque tweeted:

Name a book that changed your life.

— umair haque (@umairh) February 4, 2013

My response was:

Michael Stewart’s “Keynes and after” > RT @umairh: Name a book that changed your life.

— Alex Marsh (@ShodanAlexM) February 4, 2013

If anyone ever asks me a question like this I always respond with Stewart’s book, even though I can hardly remember what it says anymore.

Having tweeted, it all went a bit Proustian. Memories of the book, when and where I read it, came flooding back. And I considered whether I could really say it changed my life. Continue Reading →

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