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By Cahal Moran, who is studying for a PhD in economics at the University of Manchester. He is a member of the Post-Crash Economics Society at the University of Manchester and coauthor of The Econocracy: On the Perils of Leaving Economics to the Experts. Originally published at openDemocracy
In his excellent book ‘Economics Rules’, Dani Rodrik outlined what he saw as “the rights and wrongs of the dismal science”. One of his key refrains was that the problem was “economists, not economics”: that is, some economists mistook their models for the real world and applied them inappropriately, abusing a potentially useful set of tools. All too often the consequence was ideology masquerading as science, resulting in economic failures such as quantity-targeting monetarism in the 1980s; the 1990s Russian privatisation; and recently the 2008 financial crisis. According to Rodrik, good economics is about making sure you have picked the right model for the right job, basing your decision on sound theory and evidence. Any economist worth their salt should be pragmatic, not dogmatic.
Rodrik is not wrong that there are some economists who are prone to misusing their models, in some cases to an alarming degree. Neither is he wrong about what good economics should entail: intellectual flexibility and a grasp of a wide range of tools for understanding the economy. Despite this, I cannot agree with the general idea that the framework of economics is not the problem with the discipline, and that if this framework were only taught and practiced better many of the discipline’s problems would be overcome. In fact, I believe modern economics is characterised by the exact opposite problem: reliance on a single framework is hamstringing the research of capable, conscientious and (to a degree) critical economists. In other words, the problem is economics, not economists.
The bad economics Rodrik highlights should be resisted for sure, but it largely a vestige of the past and does not represent the current direction of the discipline. This is what causes researchers who better represent contemporary economics to become exasperated in response to the myriad of articles criticising the discipline as if it consists solely of free-market ideologues who cling to models of perfect markets. Two Manchester colleagues of mine, Rachel Griffiths and Diane Coyle, have been involved in this debate recently, and the hashtag #whateconomistsreallydo illustrates the frustration and perplexity many of these researchers share at criticisms of the discipline.
In a recent article for Prospect Magazine, Coyle counters a critique by Howard Reed by rattling off several contemporary examples where she believes economists are doing relevant, empirical work that has nothing to do with incubating financial crashes. Among these are papers looking at the benefits of railroads in 19thcentury India; the effect of modern technological change on jobs; and the effect of sugar taxes on obesity rates in the UK. These examples should be enough to convince people that a lot of modern economic research is going in the right direction.
But in my opinion the issue is not so much what economists do as how they do it. Critical thinking exists within the discipline but this criticism remains solely within the bounds of the mainstream. For a long time now ‘economics’ has been synonymous with a specific methodology, the use of which is considered interesting in itself regardless of whether it uncovers anything new.
Relevant, Interesting – and Unnecessary
At the Royal Economic Society (RES) conference this year, Botond Koszegi gave one of the keynote lectures, ‘A Pro-Market Case for Regulation’. Koszegi is a prominent researcher in prospect theory – which happens to be where my research interests lie – and along with his co-author Matthew Rabin is a likely candidate for a future Nobel Prize. The nub of his presentation was a model in which consumers, due to cognitive limitations, were unable to fully examine every single product they purchased. The result was that regulations guaranteeing a certain standard of safety, quality and the like could improve competition by giving people more time to shop around instead of having to devote so much time to investigate specific products. Thus, regulation would improve markets and competition.
I cannot fault Koszegi’s presentation, which was lucid and engaging. I also cannot fault his technical skills, which certainly surpass mine (a low bar, admittedly). I cannot fault the subject matter of his presentation, which was relevant and interesting. Nor can I fault the certain kind of creativity required to put these insights into an economic model. But then, that’s just it: to get an audience among economists, these insights hadto be put into an economic model. Incorporating ideas into these frameworks is a necessary condition for their acceptance, something which stifles the production of knowledge.
Like them or not, the points highlighted by Koszegi were not especially novel. Koszegi himself argued that his framework rationalised existing policy by UK, EU and US regulators, rather than proposing a bold new direction. A quick search uncovered a 2011 UK government documenton regulation – produced a good while before Koszegi’s research – which stated that “If consumers do not have sufficient information, or find it difficult to make informed decisions, firms face less competitive pressure”. Institutional economists such as Jamie Galbraith have claimed for a long time that markets function best when “the product is what it claims to be, and that it will function as it is supposed to do. This is what a strong system of regulation provides”. Clearly, we did not need a complicated theoretical model to make this point.
The dynamic of using standard economic methods to say something which is in some sense already known is quite common. One largely glowing article about last year’s RES conference published in the Independent came close to realising this when it said that “there is one [paper] that shows that married women are tidier than married men and do more housework after they get married. I think many people will be unsurprised by that, but it is good to have it established.” I can’t help but feel that this point was “established” long before economists turned their gaze toward it, and despair at the wasted intellectual capital from “establishing” it when there are far more pressing questions in the world.
As the old saying goes, “if you have a hammer, everything looks like a nail”. Economists have two main hammers: choice models and variants thereof form the basis of most theoretical models (I include behavioural economics in this, which still uses the utility maximising framework). Linear regression is economists’ preferred empirical technique (again, commonly used variants such as panel methods or instrumental variables are still fundamentally linear). Research incentives typically mean adhering to at least one of these two techniques, despite the plethora of other techniques available. The aforementioned ‘institutional’ school of economics might prefer a theoretical lens which looks at social and legal structures over individual choice, and an empirical method which focuses on qualitative details over statistical techniques. This is just one of the many alternative methods available to economists.
Mainstream economic papers often deal with what seem like exciting questions, but give ultimately disappointing answers because they follow the same old methods. I cannot count the number of times I’ve been lured into an economics presentation by a promising title only to be frustrated with the actual content. At Manchester last year there was a presentation with the scintillating title “Networks in Conflict: Theory and Evidence from the Great War of Africa”, which I enthusiastically attended. Many others clearly felt the same since the room was completely packed out, including undergraduates (who don’t usually go to these seminars).
But as the presentation began it became apparent that they were going to approach the issue using…dum dum dum… a rational choice model, followed by some linear regression! I felt that the war in the Congo was as good a candidate as any for something that was neither rational nor linear, but these underlying assumptions were not even discussed in the presentation or in the paper, which has since been published in a top journal. This could be forgiven if the paper contained revelations about the war in the Congo, but actually its key conclusion verged on trivial: the more your enemies fight, the more you have to fight; the more your friends fight, the less you have to fight. Besides being underwhelmed by this, I was surprised a paper on networks didn’t utilise Granovetter’s network analysis, arguably one of the most famous tools in sociology.
The question is not whether rational choice and linear regression can be useful; anyone who believes they cannot is talking nonsense, as some of Coyle’s examples illustrate. The question is whether they are always useful, which would also be nonsense, but is something you could be forgiven for thinking economists believe when following economic research. The rational choice model has had quite a few successes, including in matchingkidney donors to one another, but it has at least as many failures, most of which are so well-worn at this point that it’s not worth going over them again. Linear regression is likely to be the right statistical model most of the time, but this still cannot be assumed a priori. Coyle rightly highlights two recent papers, one by Alwyn Youngand one by John Ioannidi s, which have cast serious doubts on widely used econometric practice and they are far from the first to do so.
Economists may respond that modelling and empirical estimation allows them to isolate and quantify formerly nebulous mechanisms to make the exact trade-offs of policies clear. However, I suspect that in many cases this is a spurious kind of precision, since estimated coefficients and modelling parameters are notoriously unstable. Out of sample predictions are not made habitually in economics, and when they are they have a mixedtrack record, to put it mildly. Furthermore, the choice of model will affect the conclusions, both by determining what to model and by modelling it in a certain way. As both Coyle and Reed agree, this makes value judgments implicit in economic models, but many economists are insufficiently aware of this point and tend to see standard models and regression as the default framework.
The other defence is a practical one: sure, these methods have their flaws, but they are the best way to convince policymakers, politicians and the public that a policy has a quasi-scientific justification. While this may be true given our current state of affairs, there is a circularity to it. Part of the reason that this kind of research is deemed necessary is because of the influence of economists in government and society over the past 80 or so years. By embracing a wider variety of approaches to knowledge, economists could use their considerable influence to alter the perceptions of those in power instead of reinforcing the reliance on a single framework.
It’s Monolithic All the Way Down
The uncritical acceptance of one methodology begins with undergraduate economics education. Rethinking Economics conducted a curriculum review of 174 modules at 7 Russell Group universities – rightly or wrongly considered the ‘top’ universities in the UK – and we found that the uncritical acceptance of one type of economics begins with education. Under 10% of modules even mentioned anything other than mainstream or ‘neoclassical’ economics; in econometrics, over 90% of modules devoted more than two-thirds of their lectures to linear regression. Only 24% of exam questions required critical or independent thinking (i.e. were open-ended); this dropped to 8% if you only counted the compulsory macro and micro modules that form the core of economics education.
We have previously called this ‘indoctrination’, and while this may seem dramatic the dictionary definition of indoctrination is to “teach a person or set of people to accept a set of beliefs uncritically”, which we think adequately characterises the results of the review, as well as our own experience and many widely used economics textbooks. Given this education, it is no wonder that economists remain wedded to the fundamental precepts of choice models and linear regression no matter where they turn their attention. By putting the method first, the implicit assumption becomes that answering a question using this framework is prima facieinteresting, and critical evaluation of these tools against others is made unthinkable.
This debate may seem too abstract to warrant such extended public discussion, but economics exerts more influence over government, the private sector and the media than any other social science – perhaps than any other discipline altogether. And the intellectual monopoly outlined above makes itself known through this influence, which limits our perceived political choices. Economic debates, including the one surrounding the recent Brexit vote, are frequently conducted in terms of aggregate GDP, which despite some criticism remains the standard measure of economic success both among economists and the public, even though it ignores (among other things) regional disparities in the UK and therefore does not speak to many peoples’ lived experience. This is perhaps one reason why the ubiquitous forecasts of a loss to GDP from Brexit failed to persuade the country.
One, more concrete example of the influence of economic ideas is the Green Book, a document produced by the UK Government that sets out the framework for the appraisal and evaluation of all policies, programmes and projects. It is remarkable how much this book reads like a first-year economics textbook in places: like a standard textbook, it focuses largely on economic efficiency while also acknowledging equity (distributional) considerations. It then spends much time discussing how to place economic values on the costs and benefits of policies to weigh them up. Other economic objectives such as security, stability, or economic freedom are not given much (if any) attention; other decision-making criteria (especially more democratic ones) are similarly absent.
Rethinking Economics believe that the curriculum needs to embrace a wider diversity of views, as well as focusing more on the real world and less on derivation of abstract models. But even in this debate the poverty of imagination resurfaces: when we call for the curriculum to teach us about issues such as the financial crisis, inequality and immigration, we are frequently met with the rebuttal that the relevant models are too complex for undergraduate education or would take too long to teach. Once again the assumption is that mainstream economic models are the starting point, when it is perfectly possible – desirable, even – to learn about issues such as the financial crisis without using any type of model. Models may help you to understand it at a higher level, but this should be built on top of a strong real-world foundation. Putting the real world first would mean that future business leaders, policymakers and academic economists would not enter the world believing that ‘economics’ is synonymous with one type of approach.
I believe that Rodrik’s bad economists are not a few unfortunate renegades; they are the reductio ad absurdum of the education and research practice outlined above. When economists are only taught one approach as if it is economics, then it’s unsurprising that some take it too far. In one sense what’s remarkable is how far contemporary economists have been willing and able to stretch the core framework to accommodate more relevant insights, working with such a limited set of tools. Despite this, areas of the discipline risk finding themselves in a bit of an intellectual dead end by putting their method first and using it to say things which are new and interesting only to economists.
Rethinking Economics and the wider student movement to reform economics believe that ‘critical pluralism’ is the antidote to this problem. If future economists are taught about relevant issues, using a wide range of models where necessary but not insisting upon them, less effort will be devoted to extending particular methods to trivial or long-answered questions. In policy and in the public arena, economics will give us a better conception of how the world works, and a broader array of political choices for making it a better place. Students will not only have a better understanding of why standard economic tools may fail; they will have a better understanding of when and why they are successful. Critical thinking will be embedded from the start of an economists’ training.
Several positive signs indicate that the discipline could go in this direction: the open-minded initiative Rebuilding Macroeconomics; a new focus on economics communication, including the fantastic session I attended at this years’ RES; the revamped CORE curriculum, which seems to be slowly becoming pluralist even if its adherent are reluctant to admit it; and initiatives from within government institutions such as the Bank of England and Government Economic Service, which are embracing pluralism. In fact, the newest version of the aforementioned Green Book, published this year, now includes an entire section on the limits of standard economic analysis when dealing with the environment and alternative approaches.
Here’s hoping that this kind of approach will be the norm for the economics of the future.
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“….and the effect of sugar taxes on obesity rates in the UK.”
…..
As the old saying goes, “if you have a hammer, everything looks like a nail”.
=======================================================
I have a tough, tough time believing that sugar taxes have ANY affect upon obesity rates.
I think smoking has declined due to public health knowledge and I think the high tax rates on cigarettes proves that the monetary incentives play a very small, if any, affect on people’s willingness to smoke.
Just like I think the death penalty will have no effect on drug dealing (or murder for that matter, unless one wants to argue for an INVERSE affect)
https://deathpenaltyinfo.org/deterrence-states-without-death-penalty-have-had-consistently-lower-murder-rates
Taxes are a good way to fund cures or therapies for the problems the taxed good causes. E.g. lung cancer from smoking could be paid this way if the health providers would actually get the tax money. To push people away from the harmful good, it’s useless, as are punitive measures (drugs). It would be a good idea to tax them and fund therapies with it. Certainly one should do this in the opioid crisis. The pharma opium dealers need to be hit with a tens or hundreds billion dollar fine and from now on pay billions per year for treatment.
They actually should all need to go to jail or the death penaly in applicable states, but that is obviously wishful thinking so fines and taxes is the best outcome to hope for. Tho it’s only a very slim hope.
You only get actual change of behaviour if the problem case gets socially ostracized, like smoking. “You drink some cola? Wow, are you a loser.”
Exactly.
When I first became a full-time AZ resident (as opposed to being a snowbird), I was amazed at how smoking was regarded. It was as if you were engaging in a habit that made you a leper. And, if you really wanted to talk bad about somebody behind his back, you’d say “He SMOKES!”
I never saw this level of smoking hatred back in PA.
IIRC, many people moved to AZ because of allergies or lung problems. Friends of my parents moved to AZ in the ’60’s on doctor’s recommendation b/c Mrs Friend had severe allergies and they didn’t have the good antihistamines and stuff to treat allergies that they do now. AZ had little pollen, due to being a desert, and less air pollution, due to being, uh, largely uninhabited. By the late 80’s that had changed since so many new residents had planted lawns and gardens (doh) and of course drove cars. So maybe AZians have a clean-air bias?
Many of Arizona’s clean air laws are the work of a Republican state senator by the name of Douglas Holsclaw. He fought in WWI, developed TB, and had to scuttle his plans of going to Harvard Medical School.
He moved to Arizona to recover, and, man, did he ever. Met a lovely lady named Alice, they married, and then they went into real estate.
Doug and Alice did very well real estate. Very well indeed.
Late in life, Doug gets himself elected to the state senate and becomes an institution. Guy was really good at getting legislation passed. Given his youthful health problems, he was very interested in clean air, and he shepherded many bills through our legislature.
I met Doug and Alice in the late 1980s. Doug was no longer a senator, but they were major donors to the University of Arizona. I worked in the UA’s fundraising operation.
They were a delightful couple, still madly in love with each other, and very committed to the university. To the point where I remember Doug and my boss arguing over a gift that he wanted to make to the campus health center.
While he was a UA student, the health center saved his life, and he still was very grateful. Boss said that student health was a state responsibility and couldn’t take private donations. Back and forth they went.
Finally, the Holsclaws and the UA agreed on naming a health promotion plaza after the family.
Sounds like an older model of Republican. Sounds like what older Michiganders would have called a “Milliken Republican”.
You mean like this, Slim?
https://www.youtube.com/watch?v=gUEjnoWpdao
For nearly thirty years after the Efficient Market Hypothesis (EMH) became received gospel in the mid-1960s, the claim that stock prices exhibited momentum (which shouldn’t be true in a perfectly efficient market) was roundly mocked by mainstream economists.
Then in 1993, Jegadeesh and Titman published a paper titled “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency” in the Journal of Finance. Its evidence for a momentum effect was impossible to refute.
So economists bolted en masse to the opposite side of the boat. Today there are thousands of papers on momentum, often presenting some fairly trivial arithmetic that home-based amateurs have long used. But it’s formulated into equations with Greek letters, and a [totally boring] statistical panel appears in the Appendix to prove some statistical significance.
A few professors actually exploited their discoveries to get rich. Cliff Asness, a U of Chicago PhD (but a practitioner, not a professor) offers some light-hearted commentary on his mentor Eugene Fama:
Mr. Haygood
If it was only like the movie THX1138.
Where the police were call off their pursuit, when within a finger nail of – helping – their subject. Because the economic perimeters their models produced, with the help of computational machines, gave a ridged defined view of the operation. Seems the subject was operating outside the econmetric perimeters due to mental illness – was a patient whom escaped at the time.
Alas we never get to see what he saw when he popped out on the surface, save a blinding orb.
In retrospect did they do the underground thingy to better control, could nature itself be a threat to the model, hence the need to control every aspect of enviroment for behavioral reasons.
Anywho I’ll just leave this on my way to work:
“If we accept that we need fundamental reform, what should the new economics—“de-conomics” as I’m calling it—look like?
First, we need to accept that there is no such thing as “value-free” analysis of the economy. As I’ve explained, neoclassical economics pretends to be ethically neutral while smuggling in an individualistic, anti-social ethos …” – Howard Reed
https://www.prospectmagazine.co.uk/magazine/the-case-for-a-new-economics
That’s really a powerful tool in a world which is chaotic.
The trouble with embracing chaos and catastrophe theory is the “chaos” part of predicting the future. But economists, being human and liking their paychecks, are not interested in any predictions which do not cater, or pander, to the needs of their bosses or paymasters.
Why, that might suggest the boss is wrong! Such heresy leads to a quick execution!
Fundamentally, economics is a religion, with priests, high priests, creed, dogma, punishment for heretics, and all the other trappings of a religion. But the pay is good, so Clive’s rule for middle class jobs applies.
Disclaimer: My view of Religion is similar: Why?
1. You’ll get your reward in the afterlife, after you are dead!
2. We know this is true, because we’ve never had a complaint.
Linear regression certainly is a powerful tool for examining linear distributions, but it essential to first confirm that the distribution is linear, and to remember that on occasion, samples drawn from random (unrelated) distributions can show a spurious correlation.
Very true, but how is this proven? In nature and economics are there any linear distributions? If so over what range?
I notice a preponderance of using straight lines instead of growth curves. I also notice chaos, or noise, in behaviors, coupled with a complete non-understanding of entropy.
In nature linear behavior is unlikely. If it were linear we’d see straight branches on trees, rainfall evenly distributed and the wind would always blow at constant speed, with predictable eddies.
I suppose a rock dropped would exhibit linear behaviors until it hits the ground, and at that point in time the “dropping rock” system become decidedly chaotic, from stuck in the mud, to bouncing in a random direction, to bursting into pieces, pieces who’s destiny is completely uncertain.
― Nassim Nicholas Taleb, Antifragile: Things That Gain from Disorder
Nassim, I think covers all this better than anyone else. Would love to hear of similarly comprehensive works.
https://www.penguinrandomhouse.com/series/INO/incerto
Fooled by Randomness covers problems with assumed linearity and normal distributions.
And the most pernicious real-world problem with the received wisdom of “linear-ness” in the minds of economists is that this fantasy thinking then penetrates the halls of the central banks…so we get high priest CB practitioners who think they can dial precisely the cost of money to produce some imagined linear result.
When in fact an “economy” is an infinite set of interconnected actions, motivations, sentiments, decisions, regulatory factors, and a continuous supply of brand-new inputs whose effects are unknown and unmodelable.
So they apply their butcher’s thumb to the scale of the most important price signal of all in an economy: the price of money. They are universally and uniformly wrong, and all it does is lead to massive distortions, imbalances, and capital misallocations on a gargantuan scale. These eventually rebalance, destroying huge sums of capital in the process. It’s stupid, inefficient, and insane.
Amen.
From Sir David Attenborough, the most admired man in Britain (11 April 2018):
…or believes in an infinite sponge for externalities.
Attenborough is out of his depth and suffers the same dilemma Soddy did. I would also add the fallacy of most admired is not relevant, suffers from many categorical errors, emotional plea being foremost.
Growth is not always correlated to more consumption, in fact, it can be less or resolving externalities from past growth that did not incorporate such events, yet sets the stage for a more diversified and local economy.
What I find the hardest is such thinkers are also the ones most responsible for the last 50ish years, in one guise or another.
What is the dilemma which Soddy suffered?
Engaging in a form of scientism when the topic is natural history, where anthropology, psychology, etc, are better suited to understanding.
I have the same issue with AMI and monetary books titled “The Science of Money”.
Not sure you’ve read Soddy, but if you have, can you elaborate with specifics. Without semantic cages of absolutes nor hyper-ascription without context. Keep in mind that he was a scientist, challenging economic orthodoxy in 1930’s England.
The term scientism generally points to the facile application of science in unwarranted situations not amenable to application of the scientific method.
Soddy’s attempts at linking the physical world via a quasi scientific approach without doing a thorough heterodox examination of our species wrt monies is my point i.e.
“Being scientist/technologists, Fuller and Soddy felt the need to define wealth, to quantify it in an equation. They knew the components of wealth were physical resources – matter and energy – and the level of knowledge available to most effectively employ these resources. Simplistically stated:
WEALTH = (MATTER + ENERGY) x HUMAN KNOWLEDGE
Energy stored in fossil fuels – Earth’s energy savings account – is, of course, unavailable after the fuels are burned. But both Fuller and Soddy understood that expanding human knowledge would eventually make it possible for humanity to operate on Earth’s energy income using solar, wind, tidal, biofuels, etc. (but for lack of political will and resistance from the fossil fuel industry, we have reached this potential today). Additionally, the First Law of Thermodynamics says the total amount of matter and energy in the universe is constant and can be neither created nor destroyed, only interchanged. Since knowledge can only grow, wealth can only grow.
It is critical to understand that wealth is governed by the laws of physics and is incorruptible, whereas money is governed by the laws of man and is infinitely corruptible.”
I could start with models and applications of theory between interdisciplinary modes of inquire – chalk and cheese. Was Soddy an accountant, deal with issues like sound finance vs functional, or have any depth wrt international systems – no. Worse bit in my book is it moralizes the money question without dealing with the broader social ethos and how that is forwarded via dominate ideology.
To that quandary I brought up atomistic individualism on this blog some time ago, Syll has recently mentioned it. Its in these things that proceed baked in human tool user problems like money.
I would only add that anyone that reduces humanities issues to monies is verging on money crankery.
Thanks for the feedback, I appreciate your always interesting point of view. Not quite sure how to respond.
Claiming “money crankery” and ascribing reductionism doesn’t invalidate his many insights, written in 1930s England. The issues of credit, debt, “money” are context dependent, and I’m not sure that you can think of them in absolutes. He certainly seemed to allude to this throughout his writings.
https://www.nakedcapitalism.com/2014/04/philip-pilkington-constitutes-money-crank.html
Thank you skippy and the follow-on commenters for a serious genuine reply-to-and discussion-of my question.
It has been years since I read ” Wealth, Virtual Wealth and Debt – – The Solution of the Economic Paradox”. In light of this subthread I will have to dig it back out of my bookpile and read it again . . . and slower next time . . . to see what I end up thinking.
Why would I even bother to do that? Because it still seems to me that Soddy was at least trying to understand “economics” in terms of the biophysical world in which we all live and in which we do everything we do, including trying to understand “economics”. He was at least trying to see how matter-and-energy harvesting in order to do thing-making and stuff-doing could actually be reality-based understood in terms of the best actual knowledge of matter-and-energy reality
existing in his day. If that fails to take account of all the cultural/psychomental/etc. things that humans will do within the picture frame of nature’s biophysical constraints, that is a problem we will have to try taking account of in our own extremely troubled day.
But his scientism was at least an effort to ground “economic” understanding within real scientific knowledge. His scientism is still better than the cardboard replica scientism practiced by today’s mainstream economists who are merely spray-painting a bunch of scientism onto the paper-mache’ sewage-filled pig which is all that their mainstream discipline of mainstream economics ever even is.
Or ever even will be.
Only if you disengage growth and energy use. (Perpetual Growth Motion Machine, Skippy?)
There is all manner of efficiencies from the scientific aspect and better means of social organization WRT goods and services on offer.
Money is not or should not be held hostage in this outlook.
Disagree on the price of money pod, that is both a tautology and a bimetallism preference, which fall befoul of all the evidence against it e.g. humans have operated on credit from before money was even a thing.
Its always been a case of time and space acerbated by environmental conditions, political winds, and human emotions et al.
I would submit that as such contracts supersede money itself e.g. law. Now what dictates contractual laws and the enforcement of them is for all intents the price of moeny or to put it another way the quality of money.
This gets right back to the arguments about some trying to moralize money by its form, which is grounded in barter theory, which again is an ideological predisposition.
I’ll leave it at that for now.
Lyapanov’s work on the inherent instability of complex systems which was used as a basis of Chaos Theory, is enough in itself to relegate predictions based on a linear model when applied to the complex to be thrown into the dustbin of history.
LTCM L.P. Was I believe wiped out due to a combination of the 90’s Asian & Russian crisis’ ( karma in the case of the latter ? ). It would be impossible to discover which tiny flap of the butterfly’s wings initiated the tipping point or to predict it beforehand.
But as long as it works for those driving it.
I’m in Sylls camp as it were.
Stumbling and Mumbling has a good riff on this topic:
“. Economics, for me, is not about armchair theorizing. It should begin with the facts, and especially the big ones. The facts are that share buy-backs do usually matter, so thought experiments that say otherwise are wrong from the off. Similarly, the fact that wage inflation has been low for years (pdf) is much more significant than any theorizing about Phillips curves.”
The comments are good as well:
“That’s a category error: you don’t define “Economics”, tenure committees define it, and they award tenure to people who have a long record of publishing “internally consistent” (“armchair theorizing”) papers.”
“I found myself sitting next to a very likable young middle-aged academic tenured at an elite British university, whom henceforth I will refer to as Doctor X and whose field is closely associated with this blog. … Every year I publish papers in the top journals and they’re pure shit.” Doctor X, who by now had had a glass or two, felt bad about this, not least because “students these days are so idealistic and eager to learn; they’re really wonderful.” Furthermore Doctor X could and would like “to write serious papers but what would be the point?” ”
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2018/04/facts-vs-hand-waving-in-economics.html#comments
Yeah. I’m inclined to think the author needs to curb his enthusiasms and take up dejected drinking.
This is Nobel-level work? It amounts to finding a way to pitch a product to anti-regulation dogmatists. I’m sure that you could find similar arguments being made during the Progressive era regulatory push. Only they would have been framed more as “people will have more time to shop around if they’re not killed by previous ingestion of the product.”
It’s encouraging to read that economists are criticizing the paradigm from within.
Pluralism is a loaded term that could easily describe the Democratic Party’s identity wedge. Author seems to use it to suggest refocusing the disciplinary lense on a new, more inclusive set of outcomes, and thinking pragmatically outside the box when modeling around them. And that’s great. IMO infant mortality and malnutrition are more worthy of attention than the current account, and economics should reflect that. But I’m impatiently waiting for the field to take its 40 year old cue from the useful sciences, and try for models with more rigor to detail and less elegant creativity.
Wake me up when an economist says, “Let’s stick to complex models for complex systems. Simple ones don’t work. Thank God for computers at least they’re good for something!”
You are really advocating for “less elegant creativity“?
Ignoring the faint whiff of physics envy (pardon if I misread), as to
Nonsense. What could be simpler than the Mandelbrot equation:
f(z) = z*z + c
That generates the infinitely recursive fractal set. https://en.wikipedia.org/wiki/Mandelbrot_set
There is a marvelous set of physical phenomenae modeled with this set, but the space here is too limited to list them all.
Lol I think we are on the same page.
Science: Mandelbrot Set is as Complex as Can Be
The Mandelbrot set’s elegance is nothing at all like the clever elegance of the supply and demand curve or the efficient markets hypothesis. Just graphing the set, revealing the marvelous set of physical phenomena reflected in its pretty spirals, demands the kind of mathematical rigor best left to a laptop. To appreciate the efficient markets hypothesis’ elegance you only have to ignore poverty and suffering. They’re different, and I don’t think you mean to suggest they are the same.
I don’t do climate math but it doesn’t take too much digging to find that practical application of fractal descriptors is a messy business. Lifted from comments at Earth Science Stack Exchange:
There’s a significant difference in the way the above commenter approaches complex uncertainty, compared to educatuonal practices the author rightly calls out: the rebuttal that the relevant models are too complex for undergraduate education. To be fair, their suggestion to not use any models at all when talking about inequality, crises and so on is probably a good one.
But so is the idea that you can face complexity by digging into it, sorting and stacking with a big toolbox of elegant little bits of math (mostly Mandelbrot inspired) until you find something that kind of works — accepting that messy, uncertain predictions are actually better than reductivist platitudes dressed in the apology that things are messy and uncertain. Applied entropy reflects more rigor than elegance. It’s also how a lot of pretty good science extracts reasonable approximations out of too much data. And it’s absence in the economic discourse is as glaring as the theoretical insistence that linear models have any use at all (said more eloquently by Eustache above).
P.S. — Physics envy?
Few things are as dangerous as economists with physics envy [aeon.co].
Thanks you bdy, for that, I thought I’d probably misunderstood you…and then got out over my skis a bit.
Yeah, I bet Edward Lorenz regrets the “butterfly effect” name, suggestive of fractals, leading to such as “The Butterfly Effect – Chaos & Fractals – STScI” resulting in the mush you mention.
I love this mysterious clue to the plumbing of our universe:
Julia and Mandelbrot sets of the Riemann Zeta Function [dhushara.com]
Making the problem ‘either-or’ is a serious mistake. It is largely both. Either-or-{or both}.
When I first ran across Marshall’s Utility as a satisfaction or a benefit, I said to myself that these were two different things. Indeed, I’ve always thought that any degree of satisfaction is contingent on receiving a desired level of benefit in a desired manner, so though I might get some benefit from only being able to ‘consume’ less than what I need to survive –replacing calories, vitamins, minerals used up daily– it’s quite a stretch to assume that I am satisfied because I get a benefit, however meager it might be relative to my needs. Just imagine a corporation being told that if it profited at all –and even if that profit was far less than what it anticipated/hoped for– it should be ‘satisfied’, for any profit is a benefit it should be grateful to have.
Also, it’s entirely possible to get the benefit one needs (to survive) without being satisfied with how one got that benefit. If one buys into ‘indifference’ theory — which assumes that how one got the benefit doesn’t matter any more than the level of benefit does — then simply relaxing some assumptions at the margin does not actually advance much, if anything. Simply saying that the world in this or that respect differs from what is being modeled, is perhaps more scientific, but is not so when the overall model is itself unscientific. It should be obvious, for instance, that providing unemployment insurance can add to the efficiency and effectiveness of job searches, but is that the only good reason for providing such insurance? Models love either-or but these do not capture the host of reasons behind Lord Beveridge’s thinking (actually a lot coming from E. F. Schumacher) way back when.
It’s fairly straightforward to build in constrained optimization where the size, nature, and desirability of benefits (and how these are gotten) enters into whether or not satisfaction or dissatisfaction can be said to be taking place.
Blackboard economics is as much a problem as blackboard economists.
I haven’t been involved in the field since 1966 when I changed majors after deciding economics was more of a religion than a science, since it was based on untenable assumptions. However, hasn’t the field since been influenced by behavioral economics? Aren’t economists finally studying actual human behavior, instead of modeling how they think people should act?
Critics of mainstream economics are legion and the criticism stretches away into the hoary past. Still one more critique is always a welcome addition to the pile. The question is, how is this particular critique going to influence the current and future practice of the discipline?
What seems to me to be missing from this particular analysis (and many like it) is any discussion of the forces that have shaped economics into what it is (in this case, an over reliance on the “rational” choice model and linear regression). If one ignores those forces or fails to address them, then indeed it may seem like the dawn of a new age when a new idea circulates in a symposium. But unless said new idea has traction against the forces currently shaping the discipline, nothing will change. Merely presenting an idea that is more rational, more accurate or more correct in modeling reality will not be enough. If it were enough, the old guard would have crumbled away long ago. Rational choice theory, for example, has been endlessly criticized, so much so that it is something of a joke amongst lay people. Yet it continues to dominate the discipline. Unless one understands why that is, and has some means of subverting it, in the words of Joan Manuel Serrat, “no esperes mañana lo que no te dio ayer”.
And not just the “forces” that “forced” economics down the channels the forces forced it to flow down, but also the people who developed and deployed those “forces” to force economics down the channels those people had laid out for it to flow down to their particular individual or social-class-anchored individual benefit.
I’ve never been in an economics classroom.
There are facts that are so powerful they cannot but fail to make it into an irrelevant model is about where I get to from reading this.
Relevance in Economics only exists for the operations of nation states.
I include states of the union or and nations in the Euro.
I drifted to the reading of Economics because my model requires it.
The Economists I am looking for are Engineers using the Science
of Economics.
Pure Science Economists & their models may or may not be relevant to currency policy, taxes, or banks. It is a wonderful achievement to create an experimental model for the tool of money with no useful application.
So as there are Scientists and Engineers, there are Science Economists and Engineer Economists.
One wonders if there could be Ecologist Economists to go along with those Engineer Economists. One wonders if the Ecologist Economists and the Engineer Economists could learn to work together to discover more real facts and observations, and develop some reality-based theories of what action will have what effect within a body-politiculturo-economic.
[U]nless said new idea has traction against the forces currently shaping the discipline, nothing will change. Merely presenting an idea that is more rational, more accurate or more correct in modeling reality will not be enough.
Absolutely! I tend to lay the ‘blame’ at the feet of the economic ‘mathemagicians’ who basically took over the professional journals and academia in the 1970s and afterwards. We could go back to Samuelson’s Foundations of Economic Analysis or back even further to the influence of Walras and Edgeworth and their General equilibrium followers, but the actual, and virtually complete pseudo-mathematical takeover of journals and academia came with the rise of the market efficiency schools predominated by Chicago.
Ingenuity is applauded and rewarded, whereas actual thought is ignored.
Economics is about the use of resources in sustainable ways to provide various objective quantitative benefits that improve the qualitative and quantitative aspects of human life. Since to use is to consume, all economic agents are consumers. Or, as William Jevons put it, All is consumption. To which I add: for a benefit or benefits. The Theories of the Consumer and of the Firm gloss over the reality that economic agents all use resources to derive mostly quantitatively measurable benefits, and that conflicts between various users because they ‘value’ different benefits very differently, some being prepared to effectively use up resources, being motivated by acquiring money as their supreme ‘value’.
In the absence of all other ‘benefit values’, the monetary system imposes the ‘balanced basket’ constraint px1x1 = px2x2 = … = pxnxn. This conforms to valuing all goods in solely monetary units. This means that all ‘so-called” indifference curves of the form I = xnyn merely show how much of x and y would or must be ‘used’ to purchase varying amounts of x and y at current prices facing consumers and irrespective of the incomes distributions within society. This is an ‘ability to pay’ constraint in a pure monetary system … and it can be shown that the incomes distribution in such a monetized system very much determines what is produced and for whom and with what benefits or losses of benefit to society.
Dude – they aren’t actually doing fancy math. Linear regression – like it’s 1850!
Most of their important proofs are irrelevant crap with wholes. The math is mostly undergraduate math! The emperor has no clothes!
The problem isn’t just math trickery – it’s not even proper ingenuity.
Just read a Summer or Krugman paper – it’s 70 pages of words, 3 graphs of imaginary numbers and stats 2 equations. That’s not mathematization.
What I mean by ‘mathemagics’ is the misuse of mathematics –even simple mathematics — to create the illusion that ‘utility’ or ‘indifference curves’ actually pertain to real concepts. In reality, they ‘mathematize’ gobbledygook passed off as coherent concepts. There is nothing so conceptually barren as ‘utility’ or ‘indifference curve’ analytics. The notion that one can derive any coherent ‘demand’ analysis for any one consumer that is individual human being (or life form of any kind) for any product, or that one can aggregate these up is mathematical junk.
“regression is likely to be the right statistical model most of the time, but this still cannot be assumed a priori. ”
And we’re supposed to take this guy and his field seriously? Lr is by definition wrong unless the model and data are linear. Most problems aren’t close to linear. At best you have a regime where the problem approximates to linear in which case you can’t take the predictions seriously.
The field needs to be abandoned if this is heterodox thinking. It’s just very fancy ignoramuses. (But still – good luck with the defense ;) )
The Classical Economists used the broader political economy rather than today’s narrow economics.
The Washington Consensus dreamed of a world run by the laws of economics.
The laws of economics worked in China’s favour and the Western economies got hollowed out.
Disposable income = wages – (taxes + the cost of living)
Maximising profit required minimising wages.
The minimum wage is set when disposable income equals zero.
The minimum wage = taxes + the cost of living
China had it made and the West had tilted the playing field against itself.
The US eventually woke up the geopolitical consequences of a world governed by the laws of economics that had worked in China’s favour.
Trump has just made things worse with his tax cuts.
Theory:
If we reduce taxes on the wealthy they will create more jobs and wages.
Reality:
If we reduce taxes on the wealthy they will create more jobs and wages in Asia where they can make more profit. They can then ship the stuff back here increasing Western trade deficits.
“There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” Warren Buffet, 25 May 2005
Did your class think about the geopolitics?
I don’t think so.
William White (BIS, OECD) is on board for the benefits of the broader political economy.
https://www.youtube.com/watch?v=g6iXBQ33pBo&t=2485s
With respect, I propose that you are over-thinking it.
Economists or economics? Huh? Bottom line: economics has been corrupted (by directly or indirectly bribing economists) into logical incoherence by the rich and powerful. The problem is not the theories or the practitioners. The problem is that the entire edifice is corrupt.
Here is an example from a slightly different field. Recently it has been claimed that the chaos in Syria stems from a drought due to “global warming.” I contacted several people who wrote on this topic – journalists and ‘climate change’ scientists – asking for total annual precipitation on Syria, for the last few decades. Their responses were instructive. None of them had that data. More telling: they mostly acted as if it was weird to even ask that question. All of these people were screaming that rainfall had decreased over Syria due to global warming, yet none of them had the data, nor even thought that it was in any way strange to make such absolute pronouncements without any data. The corruption of academics is so profound, that the issue is not this or that model of methodology. It’s that the people involved are so much intellectual whores that they can no longer even recognize that they are corrupt – or even, I suspect, what corruption is. But the paychecks keep coming in and they get invited to all the right parties and are written about in the New York Times etc. , so it’s all good.