The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight – as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.
John Maynard Keynes, The General Theory (1936)
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Mathematician David Orrell writes in a new book that scientific truths may not always be “beautiful” and “elegant” theories:
It is easier to claim a theory is beautiful than to show that it actually works, or makes sense.
As further described by Christopher Shea in the article:
He [Orrell] points to modern physics, in particular, as especially prone to develop ever-more-elaborate models whose goals have more to do with elegance or beauty for beauty’s sake than anything else.
“Historically, there was this give and take between mathematical beauty and scientific productivity,” Orrell said in a recent interview. But in physics, “if you look in recent decades, it’s as if the aesthetics has taken over. Theory hasn’t had the input from data to put it on the right path.”
If even modern physics suffers from this “perfect-model syndrome” of forsaking truth and usefulness in the quest for beauty, what hope do we have for modern economics?
One of Notre Dame’s most hyped economics hires offers some critical opinions on Obama’s the State of the Union, though his remarks really sound more like something one would hear on a conservative talk show aiming to bolster the narrative about the need to shrink government:
As for fiscal solvency, the current budgetary policy is simply not sustainable, primarily because of the rapid growth in entitlement spending. If something is unsustainable, we know that it is going to stop. What is unclear is how it will stop…
Everyone knows that there must be significant budgetary changes to ensure long-run solvency, but the unwillingness to deal with this leads to heightened uncertainty. It may even be the case that this policy uncertainty is one reason that job growth has been so anemic.
The other gem is regarding establishing a living wage:
“It is contrary to all economic logic to suggest that higher minimum wages will lead to increased employment,” according to Fuerst.
Research on minimum wages and employment remain inconclusive, but anyway this quip really misses the point from the speech: many Americans feel that it is not right for employers to hire workers and pay less than a living wage. Though true that in competitive markets employers may not be free to pay a living wage, that is exactly the role of the legal intervention requiring it. The inability of some economists to admit that free markets do not always work well is really astounding.
What a wonderful new economics department that Notre Dame has constructed!
Dani Rodrik on the economists’ role in bringing about the most recent financial crisis:
In the aftermath of the financial crisis, it became fashionable for economists to decry the power of big banks. It is because politicians are in the pockets of financial interests, they said, that the regulatory environment allowed those interests to reap huge rewards at great social expense. But this argument conveniently overlooks the legitimizing role played by economists themselves. It was economists and their ideas that made it respectable for policymakers and regulators to believe that what is good for Wall Street is good for Main Street.
Economists love theories that place organized special interests at the root of all political evil. In the real world, they cannot wriggle so easily out of responsibility for the bad ideas that they have so often spawned. With influence must come accountability.
This essay in the NYT lays out the poverty situation in America eloquently:
Low-wage jobs bedevil tens of millions of people. At the other end of the low-income spectrum we have a different problem. The safety net for single mothers and their children has developed a gaping hole over the past dozen years.
And he rightfully point to politics, not policy, as the solution:
A surefire politics of change would necessarily involve getting people in the middle — from the 30th to the 70th percentile — to see their own economic self-interest…
I have seen days of promise and days of darkness, and I’ve seen them more than once. All history is like that. The people have the power if they will use it, but they have to see that it is in their interest to do so.
Edelman speaks like a community organizer here- change is not about “empowering,” but organizing the power that already exists- which is easier said than done.
Mother Jones has another dispatch from the excellent Economic Hardship Reporting Project, with this edition focused on temporary employment. It underscores, in visceral detail, how an increasingly prevalent mode of employment leaves workers economically insecure (and often unsafe).
To get one thing straight, the temporary sector isn’t exactly taking over the economy. There is a difference between “fast growing” and “huge,” and this sector is clearly the former:
In the early 1980s, employment in the “temporary help services” industry—which covers both temp workers and employees of the firms that supply them—stood in the several hundreds of thousands. Now it’s 2.5 million, a seven-fold increase in less than four decades. By 2020, the BLS foresees more than 440,000 new jobs in the sector.
However, the details of it are depressing:
Back at the Labor Ready office, I have to wait nearly 30 minutes to receive my check. The job paid $8 an hour—minimum wage. For five hours of labor, I get $37.34 after taxes. I am not paid, however, for the four hours on call, or the time spent in transit to and from the job site, or waiting to get paid. None of this meets the legal definition of wage theft, but it sure feels like it…
Labor Ready’s Oakland workforce is nearly entirely black, excepting the branch manager, who is white. Most of the workers I talk to are searching for stability but finding it elusive. They include homeowners in foreclosure, apartment-dwellers who are being evicted, and residents of motels negotiating for a few more days. And many express hope they can parlay a temp gig into something permanent…
The potential to convert a temp job into full-time employment is one of the benefits promoted by Labor Ready, but the company doesn’t actually know at what rate this happens…
Yet there’s little evidence to support the claim that temp agencies help impoverished workers…Providing low-skill workers with a temp job, they wrote, “is no more effective than providing no job placements at all.”
There is not really a big policy takeaway from this. There will always be a need for low-skilled workers, and it seems like increasingly these jobs will not even offer the protections of permanent employment. Certain things, like strengthening the safety net and increasing the minimum wage, will be a help. However, the growth of the temporary model may be seen as undermining any gains that organized labor or cooperative enterprises might seek- it would be hard to imagine either growing as fast as this sector. Clearly, our society will need to rethink how labor can have solid footing in a temp economy.
Michael Sandel has a fascinating new book out called What Money Can’t Buy: The Moral Limits of Markets. Sandel makes an old argument, that economics cannot be divorced from its roots in moral philosophy, but he makes it in a fresh light from the perspective of the 21st century. Two transformations, he writes, have made this argument more compelling and important than ever before: our world has changed towards a market orientation, and the boundaries of the economics discipline have expanded.
I do not intend to provide a summary, but want to point out one argument of the book that I found particularly fascinating and persuasive. Sandel describes the commercialization effect – which refers to when markets change the character of the good and the social practices they govern. That is, a good’s characteristics will change depending on how it is exchanged/provided, whether through market exchange or another form such as through gift, informal exchange, altruism, love, or feeling of responsibility or loyalty. Thus, the value of a commodity will depend on how it was provided. The exact same commodity may have one value if I buy it commercially and another if it is given as a gift by a friend.
Though it seems very obvious, the vast majority of economics ignores this commercialization effect. (Some behavioral experimenters such as Dan Ariely have found evidence of this effect, no surprise, and have commented on it.) This highlights how mainstream economics is an analysis of a very special case of economic activity, that done through market exchange, and this theory falls apart with respect to other forms of economic activity. A truly general theory of economic behavior of humans must recognize and deal with these aspects of human psychology and moral philosophy which give rise to the commercialization effect and throw a wrench into the standard microeconomic theory of choice and exchange.
Andrew Revkin‘s post reminds me of my time at Notre Dame. He quotes Michael Sandmel, who is graduating this year from NYU:
We had around 140 attendees from universities around the country. Many of us study in mainstream neoclassical economics departments where interdisciplinary ecological-economics, and the questioning of G.D.P. growth as a primary (or, depending on who you ask, desirable) objective, is still very much fringe thinking. I don’t attempt to speak for all of my peers, but I know that many of us share an enormous frustration with the way in which our supposedly leading institutions teach us about the economy in a way that is myopic, ahistorical, and devoid of nearly any critical conversation about sustainability or human well being.
This is particularly troubling as we regularly see our schools accredit future leaders in business, finance, and government, sending them into a world of 21st century problems with a 20th century toolkit.
Violence is again swallowing Ciudad Juarez, according to the NYTimes. Just across the border from each other, El Paso, TX and Ciudad Juarez provide a stark contrast of how two different political environments, legal structures, court systems, and police forces can lead to drastically different economic and social outcomes; Acemoglu and Robinson regularly conduct this important institutional analysis across borders on Why Nations Fail.
Yet we must also remember that the violence in Mexico is not solely a Mexican problem, in need of a Mexican solution. The decisions we make in the United States play a huge role around this porous border. Los Zetas and the Sinaloa Cartel are largely funded by U.S. drug consumption, with marijuana likely being the most profitable drug. And many of the weapons that end up in the gangs’ hands come from Arizona, with its lax gun control laws and regulations.
Acemoglu and Robinson are right to look at the different institutional structures across the border: there are reasons why the violence takes place in Mexico and not as much in El Paso. And a long term, stable improvement will require that we develop institutions in Mexico that are more like those that we find in the United States. But recognizing the porous border also alerts us to the role that Americans play, and opens up some policy options to decrease the violence: (1) ban the sale of assault weapons in the U.S. (2) end the failed “War on Drugs” (3) decriminalize marijuana (and possibly other drugs trafficked through Latin America) in order to regulate the markets and divert funds from going to violent gangs.
However, these policy options are not even part of the political discussion in the United States. The problem is that we make political decisions on issues that we do not feel the consequences; there would be huge social benefits, but not to those who vote, so these discussions do not emerge. One might refer to this situation as a political externality, where actions are not taken on certain issues because their worst (or best) consequences are not felt within our borders.