Deadly economic myths

Over at Salon, Atkinson and Lind argue that simpleminded faith in economic myths is killing America.  

I say, not just America.

I particularly liked this passage:

Myth 3: The economy is a market.

In the world of Econ 101, “the economy” is usually treated as a synonym for “the market.” But an enormous amount of economic activity takes place outside of competitive markets dominated by for-profit, private firms.

In the industrial nations of the OECD, government spending at all levels on average accounted for 46 percent before the Great Recession. Even in capitalist countries, the government is usually the largest employer, and the largest consumer of goods and services in areas like defense, education and infrastructure. Other non-market sectors responsible for goods and services production include the household (your chores are economic activity too, even if Econ 101 ignores them) and nonprofits like religious institutions, colleges and universities, charities and think tanks like ours. Markets, then, account for around half of a modern nation’s economic activity — maybe less, if uncounted household production is as big a part of the real economy as some have claimed.

What's wrong with Niall Ferguson

I have had a low opinion of Niall Ferguson ever since 2003, when he was academic hitman for the pro-Iraqi invasion interests. Following his most recent creepy outburst, Juan Cole has explained just what's wrong with the man better than I could:

Harvard historian Niall Ferguson apologized Saturday for having said that economist John Maynard Keyes did not care about future generations because he was gay and had no children.
The question I want to raise here is the over-all logic of Ferguson’s underlying reasoning. What makes him continually make embarrassing and simple errors of fact, as with his attack on Obama last summer, which Newsweek did not bother to fact-check before publication.
I would argue that the reason that conservatives like Ferguson hate Keynes is that Keynes demonstrated conclusively that when the economy goes into a deep recession or depression, the only way to get back out of it is for the government to increase spending. ... Paul Krugman once wondered, after the 2008 meltdown, why so many academic and professional economists are so anti-Keynesian, given the impressive record of correct prediction attendant on the Keynsian enterprise. I am more cynical. I don’t have to guess. I think some, or many, are corrupted by the big money that flows from upholding the independent role of capital and from belittling government efforts.
Ferguson’s outrageous polemic is an example of the ad hominem fallacy. Instead of demonstrating that Keynes’s theory is faulty (which no one has yet done), Ferguson attempted to smear Keynes and deprive him of standing in intellectual debate by calling him a deviant...
Why does conservatism even have the implicit category of the deviant lurking in the back of its collective mind?
Contemporary Conservatism erects a social hierarchy, with wealthy heterosexual Westerners (and their compradors) at the top, and other groups queuing behind them from below. The wealthy Western heterosexuals are autonomous wealth-creators, constantly dragged down by the foolish impulse to regulate inherent in the government, which in any case represents the unwashed hoi polloi.
Ferguson’s remarks come on top of another conservative Harvard scandal, as a 2010 paper by economists Carmen Reinhart and Kenneth Rogoff , which argued that deficit spending by governments hurt growth. ...
Ferguson is so tied to the demonstrably false Reinhart-Rogoff paper that he continues to defend it even after its own authors are backpedaling furiously, and continues to attack Paul Krugman, whose papers won him a Nobel prize; they noticeably lack glaring excel spreadsheet errors. (Excel? Seriously?)
The hierarchies are not only economic or rooted in style of life. Ferguson’s Western triumphalism is well-known. I was at a conference where his comments about the (perfectly nice) Oxford Islamic Center was brought up, and he shouted, “They’re in Oxford!” Ferguson thinks it was a good thing for Oxford graduates to run, and loot, Muslim countries at gunpoint during the past two centuries, but is appalled that Muslim intellectuals might turn up for peaceful academic discussions in the old college town. [emphasis SM] He was all for the Iraq War and only carped that it couldn’t be successful unless the US committed to run Iraq for decades. Presumably this is because Iraqis (Muslims after all) are juveniles that need the firm adult Western hand. The Conservative fascination with reviving a long dead and impracticable Empire is just one more manifestation of a desire for social hierarchy. The imperial masters are on top.
The creation of social hierarchies, with people with ‘good’ attributes on top and others seen as somehow incomplete or deformed, is central to contemporary conservative social thought. Christians (or, in some versions, Christians and/or secularists)? Good. Heterosexuals? Good. Muslims and gays? distinctly inferior. Moreover, the government is the mechanism whereby the second-class citizens can engineer changes in regulations that rein in the alleged money-makers, and so it is intrinsically problematic and should be crippled as much as possible.

Ferguson is a smart guy and may have done some good work along the line. But he can't be trusted.

Bangladesh: still waiting for the tide to raise all boats

If you follow the news at all, you heard about that factory fire in Bangladesh that killed about 100 workers in a textile plant. One of the striking details was the fact that these workers made something like thirty-five dollars a month.

Now the popular wisdom these days on development is that the market will take care of situations like this. Bangladesh is just going through an early phase where it has cheap labor as its main asset. Capital accumulation and so forth will allow Bangladesh to eventually become a more developed country, where people make maybe thirty-five dollars a day.

The problem with this popular wisdom is that it ignores history specifically the history of Bangladesh/Bengal. Back in the days of  yore, when the British East India Company was just moving in to the subcontinent,  Bengal was the first Indian province that it swallowed whole. At that time Bengal was a country three times the size of Great Britain, and was something of an economic powerhouse, based on the fact that it produced  a lot of – textiles. I don't know how much money weavers in Bengal made, I'm sure it wasn't much, but it was more when Bengal had an Indian ruler than after it got a British one. For you see, the East Indian Company used its power in Bengal  to favor British cloth over Indian cloth. That policy – and others –had such a devastating that millions of Bengalis died from starvation. Britain, on the other hand, became the workshop of the world, and had a dominant position in the cloth trade for a very long time. Back when people studied economic history, this was a classic topic on the effects of the Industrial Revolution.

You can see why people in Bangladesh might be getting a little impatient waiting for classical economics' predictions that a rising tide lifts all boats to get around to their neck of the woods.

Sign of the times

Business Week has an article on Ronald Coase, an eminent economist, and his latest project, an attempt to get economists down-to-earth again.

In typical journalistic style, BusinessWeek gives his age thus:

Coase, 101, began working with Wang in the 1990s at the University of Chicago.

Made me look twice or three times, I'll tell you.

Seems he did his seminal work seventy-five years ago.

This article is worth reading for other reasons than the subject's age.

A witty reply to goldbugs

Noah Smith via Brad DeLong:

It is simply not the case that we can cheaply and easily buy things with money because it is valuable. It is, instead, the case that money is valuable because we can cheaply and easily buy things with it. One way into the tangle of understanding why it is wrong is to ask each of us why we are happy accepting money in exchange when we sell useful commodities. Hint: it's not because we are looking forward to going down to the bank, exchanging our bank notes for the little disks of gold usually decorated with pictures of bearded men on one side and allegorical female figures on the other with lettering saying things like "Fecund Augustae" or "Concordia Militum" or "Fides Exercituum" on them, taking our little disks home, and feeling happy looking at them. That's not why we accept money. We accept money because if we don't have any money we have to buy commodities with other commodities, and when we do so we are unlikely to receive the cost of production for what we sell. Have you ever tried to buy a latte at Peets with a copy of Ludwig von Mises's Money and Credit? It does not go well. The fact is that your wealth is only worth its cost of production if you are liquid--if you can wait to sell until somebody willing to pay full cost of production comes along, which is not every minute. The use-value of money is that it allows you to time your other transactions so that you can realize the full exchange value of what you sell, rather than having to sell it at a discount.

But there are those people love them that Concordia militum...

Intellectual goodies on the Internet -- two sets of economics posts

Will McLean has a wide and serious interest in late medieval society, especially that of 14th and 15th century England.  Currently he is interested in how English noble households worked, and is investigating them through their preserved account books.  A number of people I know, and perhaps more readers whom I don't know, may find his explorations worth reading.  This looks like a good place to start; from there you might follow the "Economics" tag, backward and forward.

The very validity of the academic tradition(s) of economic thought is being debated, by economists most of all.  If at this point you are curious about what university students are actually being taught in introductory economics classes, then you might want to wander over to Brad DeLong's blog and follow the "Econ 1" postings starting, say, here.  Brad DeLong (who teaches at Berkeley) is a prominent controversialist and critic of much of what has happened in the United States in the last 10 years, so he is not a  neutral voice.  He has a lot to say on a lot of subjects, and if you follow him you will be exposed to a lot of material, including the arguments of people he disagrees with.  Some of this will be economic arguments that I find rather opaque, but others will be of wider relevance.

Image:  loafing -- and working -- around the old manse.

"The crisis we are in"

I thought I did not have an hour to listen to Stephen S. Cohen talk about his recent book with Brad DeLong, The End of Influence: What happens when other countries have the money. But I was wrong.

Economics as astrology?

John Emerson over at Trollblog asks a very good question:

How flawed is economics?

And then he continues:

How deep does the problem go? I can’t prove anything, but we need to consider the possibility that the problem goes all the way down. Everyone except Eugene Fama knows that there’s a serious problem, but they’re mostly trying small tweaks and trying to make sure that their faction comes out on top. I’m suggesting that the larger claims of the science of economics are fundamentally unjustified.

One comparison is with alchemy and astrology. There was a great deal of truth in those sciences and they provided the foundations for chemistry and astronomy, but their largest claims were flatly wrong. The link they saw between their data and their empirical predictions and practical claims (the transformation of metals, eternal life, the prediction of the future) was nonexistent. The grand claims were bogus.

The second problem with economics is related to the first. Even within the orthodox schools (after excluding Austrians, Marxists, and other alleged fossils) there’s incredibly wide disagreement about critically important questions. You can always get an economist to say what you want them to say. (No, this is not true of climatologists).

...

What economics really is is a form of expert advocacy, like law. No one says lawyers don’t know anything. They’re very bright and knowledgeable and, in the context of our society, necessary and powerful. They do know a lot, but no one calls them scientists. If economics isn’t alchemy (or unscience), it’s law. Economists are highly skilled mercenary advocates within an sloppy, open system which is always in the process of redefining itself. And like most mercenaries, economists are most sympathetic to those who can afford them.

There's quite a bit more. And the comment section is very interesting, too.

I would suggest, off the top of my head, that the real problem of economics is that economists, having succeeded in creating a number of simplified models of reality, have forgotten that these are simplified models of reality. Early approximations, not THE ANSWER. I have criticized what I know of Freakonomics and related exhibitionist exercises for exactly that kind of tunnel vision. In that case, smug tunnel vision.

Image: an astrological vision of the universe. Pretty, isn't it?

Brad DeLong provides an approach to the last 20 years of world history

He calls it: Six Issues for a Panel... and it's US-centric, but worth some thought:

Twenty years ago--with the end of the Cold War--American policy got dammed up:

• It was clear we needed to do something to balance the long-term social-insurance spending promises both parties were making with the long-term tax base, and we haven't.

• It was clear--first for national-security and domestic-congestion reasons, and then for global-warming reasons as well--that we needed to start imposing Pigovian taxes on coal and oil-driven energy use, and we haven't.

• It was clear that we needed to reform America's health care financing system, and we haven't.

• It was clear that America, as the globe's sole hyperpower, had a unique opportunity to build a world in which we could live very comfortably and peacefully once we were no longer a hyperpower or even a superpower but instead only one (if we are lucky) of several great powers--and we haven't.

To this in the past three years we have added:

• A recognition that the "Greenspanist" bet--deregulate finance, rely on financial company shareholders via corporate control to limit moral hazard, and bet that the Federal Reserve can lean up after any elephants that stampede through--was wrong. We need to restructure financial regulation--and we haven't.

• A recognition that the "central problem of macroeconomics" has not in fact been solved. We need to solve it--both in the short run of recovery from this recession, and in the long run of creating a world that is net, whether through global imbalances or other factors, as vulnerable to episodes like this as our world turns out to be.

About these six issues, two questions:

• Which of these six policy issues will--as many of them have been doing--continue to drift, and what damage will drifting do?

• Which of these six policy issues will the Obama administration actually be able to address--and what will be the consequences for the world of how it addresses them?

"We should avoid simple dichotomies."

I had a pleasant shock this weekend. I found out that I had already read, some years ago, a key work by one of the most recent winners of the Nobel Prize in economics, Elinor Ostrom. Her book Governing the Commons: The Evolution of Institutions for Collective Action, is relevant to the questions that Phil Paine and I have addressed in connection with our interest in a world history of democracy. Brad DeLong's blog directed me to this entry on Marginal Revolution which explains some of the reasons her work is considered interesting and important:

Elinor Ostrom and the well-governed commons

Elinor Ostrom may arguable be considered the mother of field work in development economics. She has worked closely investigating water associations in Los Angeles, police departments in Indiana, and irrigation systems in Nepal. In each of these cases her work has explored how between the atomized individual and the heavy-hand of government there is a range of voluntary, collective associations that over time can evolve efficient and equitable rules for the use of common resources. [emphasis SM]

With her husband, political scientist Vincent Ostrom, she established the Workshop in Political Theory and Policy Analysis in 1973 at Indiana University, an extraordinarily productive and evolving association of students and professors which has produced a wealth of theory, empirical studies and experiments in political science and especially collective action. The Ostrom's work bridges political science and economics. Both are well known at GMU since both have been past presidents of the Public Choice society and both have been influenced by the Buchanan-Tullock program. You can also see elements of Hayekian thought about the importance of local knowledge in the work of both Ostroms (here is a good interview). My colleague, Peter Boettke has just published a book on the Ostrom's and the Bloomington School.

Elinor Ostrom's work culminated in Governing the Commons: The Evolution of Institutions for Collective Action which uses case studies to argue that around the world private associations have often, but not always, managed to avoid the tragedy of the commons and develop efficient uses of resources. (Ostrom summarizes some of her findings from this research here). Using game theory she provided theoretical underpinnings for these findings and using experimental methods she put these theories to the test in the lab.

For Ostrom it's not the tragedy of the commons but the opportunity of the commons. Not only can a commons be well-governed but the rules which help to provide efficiency in resource use are also those that foster community and engagement. A formally government protected forest, for example, will fail to protect if the local users do not regard the rules as legitimate. In Hayekian terms legislation is not the same as law. Ostrom's work is about understanding how the laws of common resource governance evolve and how we may better conserve resources by making legislation that does not conflict with law.

The MR links and comments by its readers are worth following up. In particular I am grateful for the link to this appreciation of the work of Elinor and her husband Vincent, which includes long interviews with both of them. I think anyone interested in the history of government or economic history or institutional history of just about any sort would benefit from looking at this. The quote that I used for the title of this post comes from Vincent, who said, in a rectification of names spirit,

Language always simplifies. Yet, recourse to overly abstract simplifications such as "states" and "markets," "capitalism" and "socialism," the "modern" and the "less developed," is becoming increasingly useless. We must take care not to reify concepts and conceptual models -- to treat them as though they are realities. We should avoid simple dichotomies.

If you want to slam academia...

...you don't need to go after advanced literary theory. In fact there are juicier and more important targets. From D-squared Digest, via Brad DeLong:

Part Five - How Freaked Is Economics?

Well, I promised myself I'd finish this before the sequel appeared in the shops, and the conclusion has been made, shall we say, somewhat easier by the fact that the burden of my conclusion - that there is something terribly, horribly wrong with the state of modern economics - has become somewhat of an open door to push against. I swear that my notes for this review (begun in 2003!) contain the draft passage:

"When future generations ask the economics profession 'What were you doing while the great bubble built up ahead of the Second Great Depression?', and we have to reply 'Lots and lots of quirky little working papers about sumo wrestling and speed-dating', it is going to be really, really, fucking embarrassing"

And we did, and it was; thank God nobody told the truth to HM The Queen, or the high brows of the economics profession might be decorating a series of pikestaffs outside Traitors' Gate.

The basic problem with the Freakonomics era was that the profession abandoned the study of production, consumption and exchange. I don't wholly agree with Lord Skidelsky, but he is right - economics is the study of the economy, it's not the study of "rational choice" or "behaviour" in the abstract, and the fact that econometricians have invented a huge part of the toolkit of modern statistics doesn't mean that anything you can estimate using an econometrics package is thereby "economics".

We stopped doing economics and started doing awful amateur-hour sociology, basically, because we believed that all the major problems had been solved, that some form of dynamic general equilibrium was all that there was to be said about the economy considered as a system, and that the only interesting things to do were growth theory and finance. It is no coincidence that Freakonomics began in Chicago; for a guy like Levitt who doesn't possess the engineering-maths to be a finance theorist or the empirical skills to do endogenous growth, there was literally nothing to do.

The sociology of academia in the USA also played its part, as James Heckman spotted at the time. Because of the unenviable economics of the academic labour market in American universities, graduate students were encouraged to finish their PhDs according to a specific schedule, to write dissertations that were capable of being turned into journal articles in a specific way, and to follow fashion in citation-gathering. Heckman was tearing his hair out over this, obviously, as this made it more or less economically unviable to carry out the kind of economic work that he does (and did) - careful, time-consuming, incremental, often abstruse but always relevant to the very big questions of the economy.

And so we ended up with Freakonomics, the disciplinary equivalent of the battery chicken. The subject matter became more and more cutesy and trivial, methodological corner-cutting in "natural experiments" became the norm, and the idea that there could actually be a subject of macroeconomics became almost quaint. ...

But however things have turned out, my intuition is that Freakonomics has had its moment in the sun. The central selling point was always, basically, academic machismo; the presumption on the part of economists that because they were "smart" in the Larry Summers sense, they could turn their hand to anything and the rest of the world was bound to listen to them. Those days, to put it mildly, are gone.

To be able to put such material before student-age readers (of whom I hope I still have some) was one big reason for starting this blog. Will you find a killer critique like this in a textbook? Unlikely.

Bad Samaritans, by Ha-Joon Chang

I just discovered this book, which came out a couple of years ago, thanks to Brad DeLong, who provided a link to a pre-print to chapter 9, "Lazy Japanese and Thieving Germans
- Are Some Cultures Incapable of Economic Development?"

Phil Paine and I have been working from a similar set of ideas when we discuss the world history of democracy (or political systems of other kinds). If I were teaching first-year World History, this might be the first thing I would have my students read. Anyone interested in world or comparative history should be exposed to this.

Here are some killer quotes:

So there you go. A century ago, the Japanese were lazy rather than
hardworking; excessively independent-minded (even for a British socialist!)
rather than loyal “worker ants”; emotional rather than inscrutable; lighthearted
rather than serious; living for today instead of considering the future
(as manifested in their sky-high savings rates). A century and half ago, the
Germans were indolent rather than efficient; individualistic rather than
cooperative; emotional rather than rational; stupid rather than clever;
dishonest and thieving rather than law-abiding; easy-going rather than
disciplined.
These characterisations are puzzling for two reasons. First, if the
Japanese and the Germans had such “bad” cultures, how have they become
so rich? Second, why were the Japanese and the Germans so different from
their descendants today? How could they have so completely changed their
“habits of national heritage”?

...

Not being able to see this, culture-based explanations for economic
development have usually been little more than ex post facto justifications
based on a 20/20 hindsight vision. So in the early days of capitalism when
most economically successful countries happened to be Protestant Christian,
many people argued that Protestantism was uniquely suited to economic
development. When Catholic France, Italy, Austria, and Southern Germany
developed rapidly, particularly after the Second World War, Christianity,
rather than Protestantism, became the magic culture. Until Japan became
rich, many people thought East Asia had not develop because of
Confucianism. But when Japan succeeded, this thesis was revised to say that
Japan was developing so fast because its unique form of Confucianism
emphasised cooperation over individual edification, which the Chinese and
Korean versions allegedly valued more highly. And then Hong Kong,
Singapore, Taiwan, and Korea also started doing well, so this judgment
about the different varieties of Confucianism was forgotten. Indeed
Confucianism as a whole suddenly became the best culture for development
because it emphasised hard work, saving, education, and submission to
authority. Today, when we now see Muslim Malaysia and Indonesia,
Buddhist Thailand, and even Hindu India doing economically well, we can
soon expect to encounter new theories that will trumpet how uniquely all
these cultures are suited for economic development (and how their authors
have known about it all along).

...

Fortunately, we do not need a cultural revolution before economic
development can happen. A lot of behavioural traits that are meant to be
good for economic development will follow from, rather than being
prerequisites for, economic development. Countries can get development
going through means other than a cultural revolution, as I explained in the
preceding chapters in this book. Once economic development gets going, it
will change people’s behaviour and even the beliefs underlying it (namely,
culture) in ways that help economic development. A “virtuous circle”
between economic development and cultural values can be created.
This is essentially what happened in Japan and Germany. And it is
what will happen in all future economic success stories. Given India’s recent
economic success, I am sure we will soon see books that say how Hindu
culture – once considered the source of sluggish growth in India (recall the
once-popular expression, “Hindu rate of growth” 29) – is helping India grow.
If my Mozambique fantasy in the Prologue comes true in the 2060s, we will
then be reading books discussing how Mozambique has had a culture
uniquely suited to economic development all along.

Brad DeLong as humble economist

If more economists spoke about their discipline with a humility and honesty found in this post from Brad DeLong's blog, Grasping Reality with Both Hands, we might have a different opinion of them and it.

Not that historians don't have their vices...

Here is the post:

Justin Fox Is Still Perplexed

He wonders:

Brad DeLong tutors me on fiscal stimulus :: The Curious Capitalist - TIME.com: I guess what continues to perplex me at least a little is how lacking in the customary rigor of modern academic economics the arguments for stimulus are. It's basically just, We ran gigantic budget deficits during World War II and the economy got better. That's the kind of argument I would make, not the kind of argument I'd expect from the chair of the Political Economy of Industrial Societies major at the University of California Berkeley. It's just all so seat-of-the-pants. But it's better to be approximately right than precisely wrong, I guess...

"Lacking in the customary rigor..." Justin could mean either of two things:

1. Rigorous economics should produce tightly-estimated conclusions based on statistical sieving of mountains of data, like: when Safeway cuts grocery prices by 1%, its sales rise by 1.456%.

2. Rigorous economics should involve lots of theoretical equations with sigmas and rhos and betas in them.

With respect to the first possibility, Justin's expectations are just too high. We cannot build models up from precisely-known microfoundations--we are not chemists who can calculate how molecules should behave because we know how the electrons and the nucleons that make them up do behave. We don't have that many past examples of large-scale fiscal stimulus programs, and so we do the best that we can--and to be up-front about the partial and uncertain state of our knowledge is part of doing the best that we can.

With respect to the second possibility--well yes, I could make a bunch of arguments with lots of theoretical equations with sigmas and rhos and betas in them, but once again these theoretical equations would not rest on any solid microfoundations. Chemistry theory is built on top of physics theory. But economic theory--it is just a bunch of people looking at historical episodes and saying: "it looks like this is what happened a bunch of times in the past; let's build a model of it." Economic theory is crystalized history. But when the historical episodes out of which theory is being crystalized are as rare and as scarce as they are in the case of large-scale fiscal stimulus programs, why crystalize? Why not just take the history raw?