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Posts Tagged ‘Economic Debates’

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.

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Michael Sandel has a fascinating new book out called What Money Can’t Buy: The Moral Limits of MarketsSandel 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.

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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.

Well said!

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It’s been a little while since I last posted…theoretically, a good New Year’s resolution would be to start posting more, but I’ll have to see if time allows. I was immediately drawn, though, to this story from the latest issue of the Economist: “Heterodox Economics: Marginal Revolutionaries.” The author focuses in particular on two schools of thought- market monetarism and neo-chartalism, and on two of their champions- Scott Sumner and Warren Mosler, respectively, who inparticular have gained mainstream currency.

The article goes somewhat in-depth into the ideas of each school, but I think what is most relevant is the process by which these bloggers have risen to prominence, and what it means:

On February 25th, [Sumner] earned a link from Tyler Cowen, a professor at George Mason University whose “Marginal Revolution” blog is widely respected. And one month after he started Mr Krugman devoted a short post to rebuffing him.

To be noticed by Mr Krugman is a big thing for a blogger; all the current heterodoxies court such attention, with neo-chartalists churning up his comment threads and Austrians challenging him to set-piece debates. The more Mr Krugman wrestles with them, the more attention they garner—a correlation that has made him wary. “I’ll link to any work I find illuminating, whoever it’s from,” he writes. “I’ll link to work I think is deeply wrong only if it comes from someone who already has a following.” Otherwise, “why give him a platform?”

Mr Sumner’s blog not only revealed his market monetarism to the world at large (“I cannot go anywhere in the world of economics…without hearing his name,” says Mr Cowen). It also drew together like-minded economists, many of them at small schools some distance from the centre of the economic universe, who did not realise there were other people thinking the same way they did. They had no institutional home, no critical mass. The blogs provided one. Lars Christensen, an economist at a Danish bank who came up with the name “market monetarism”, says it is the first economic school of thought to be born in the blogosphere, with post, counter-post and comment threads replacing the intramural exchanges of more established venues.

Indeed, much of the sociology of the discipline has been driven by a gatekeeper model, in which the only way to be heard is to fit into the mainstream enough to get published. Blogging creates a different set of incentives, because people who read blogs seem to value heterodox more in and of itself, and little value is placed on conformity. It is not a perfect meritocracy- the best and brightest ideas might still be ignored if they are too radical. However, one hopes that the existence of economics blogs is chipping away at the intellectual narrowness of the discipline.

Over time, ideas from yet more radical schools of thought, like neo-Marxism or post-Keynesianism, may be deemed worthy of heavy consideration and rebuttal from the likes of Krugman or Mankiw. However, for that to happen, everyone needs to be speaking the same language. I imagine that Mosler and Sumner have had a somewhat easier time because their ideas more easily fit onto the map of economic discourse, particularly because their ideas fit well into a financial discourse. Start talking about alienation or surplus value, though, and it may be a different story.

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With increased media attention, everyone is offering up their opinions about the Occupy Wall St. movement. Find out who said what at the New York Times [ht:cr]

1. “I for one am increasingly concerned about the growing mobs occupying Wall Street and the other cities across the country.”

2. “I think it expresses the frustration the American people feel.”

3. “They blame, with some justification, the problems in the financial sector for getting us into this mess, and they’re dissatisfied with the policy response here in Washington. And at some level, I can’t blame them.”

4. “Don’t blame Wall Street, don’t blame the big banks, if you don’t have a job and you’re not rich, blame yourself!”

5. “We are the 1 percent.”

6. “God bless them for their spontaneity. It’s young, it’s spontaneous, it’s focused and it’s going to be effective.”

7. “This is like the Tea Party — only it’s real. By the time this is over, it will make the Tea Party look like … a tea party.”

8. “I think it’s dangerous, this class warfare.”

9. “What they’re trying to do is take away the jobs of people working in the city, take away the tax base that we have.”

10. “I’m very, very understanding of where they’re coming from.”

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The Economist’s visceral reaction is to scoff whenever a non-economist says something about the economy. I’ve seen the attitude time and again that, privileged to economic knowledge, Economists have no economics to learn from the rest of society. Yet I’ve witnessed that much of what economists have to say about the economy is useless at best, and incredibly destructive at worst (such as all the advice about financial deregulation since the 1990s). And at the same time, I’ve been left with no doubt that journalists, social scientists, moral philosophers, bloggers, business people, and even everyday workers can have a great deal of economic insight.

This time, a gem of economic insight from Nicholas Kristof at the New York Times. What Kristof realizes, and many economists apparently do not, is that any plan for economic recovery and prosperity necessarily needs to look seriously at the organization of firms in the United States. Publicly-traded corporations are not the only option; in fact, they seem to be one of the worst. There are various models of different organizational, decision-making, and ownership structures that lead to different economic outcomes. Kristof argues that if we want a model that encourages human development, affords universal access to healthcare, and curbs income inequality, we have a lot to learn from the organization of the US military:

You see, when our armed forces are not firing missiles, they live by an astonishingly liberal ethos — and it works. The military helped lead the way in racial desegregation, and even today it does more to provide equal opportunity to working-class families — especially to blacks — than just about any social program. It has been an escalator of social mobility in American society because it invests in soldiers and gives them skills and opportunities.

The United States armed forces knit together whites, blacks, Asians and Hispanics from diverse backgrounds, invests in their education and training, provides them with excellent health care and child care. And it does all this with minimal income gaps: A senior general earns about 10 times what a private makes, while, by my calculation, C.E.O.’s at major companies earn about 300 times as much as those cleaning their offices. That’s right: the military ethos can sound pretty lefty.

Now this is a model of the economy that I think deserves a Nobel Prize.

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The Awl has a good article about how Wikipedia, and Web 2.0 in general, have changed the way that knowledge is generated and accessed. Maria Bustillos fleshes out the implications of Wikipedia quite well, and as I will explain below, economics can benefit from open knowledge:

By empowering readers and observers with transparent access to the means by which conclusions are reached, rather than assembling them in an audience to hear the Authorities deliver the catechism from on high, we are all of us becoming scientists in this way, entering into a democracy of the intellect that is already bearing spectacular fruit, not just at Wikipedia but through any number of collaborative projects, from the Gutenberg Project to Tor to Linux…

Experts, geniuses, authorities, “authors”—we were taught to believe that these should be questioned, but until now have not often been given a way to do so, to seek out and test for ourselves the exact means by which they reached their conclusions. So long as we believe that there is such a thing as an expert rather than a fellow-investigator, then that person’s views just by magic will be worth more than our own, no matter how much or how often actual events have shown this not to be the case. For us to have this magic thinking about “individualism” then is pernicious politically, intellectually, in every way. That is not to say that we don’t value those who can lead the conversation. We’ll need them more and more, those “who are able to marshal the wisdom of the network,” to use Bob Stein’s words. But they might be more like DJs, assembling new ways of looking at things from a huge variety of elements, than like than judges whose processes are secret, and whose opinions are sacred.

I read this article last evening, about 12 hours after I happily signed up for the new initiative known as the World Economics Association, or WEA. As we know, economics needs to be opened up and pluralized badly (heck, this blog is named Open Economics for a reason). The WEA’s manifesto names a number of goals that are perfectly in line with out open-sourced knowledge operates- plurality, competence, relevance, and openness, to name a few. This new association, which will operate through free online journals and open web conferences, might be the first step towards wikifying economics. Already, the Real World Economics Review and its blog have raised the level of heterodox economic discourse and brought a solid platform. WEA aims to go a step further in terms of size, scope, and real discourse.

Now, there may seem to be a dissonance with the paragraphs I quoted from Bustillos and the fact that the WEA’s inception was ushered in with a letter from 141 founding members, all of them experts, and many of them true leaders in their fields. However, there is a vast difference between a neoclassical expert who seeks to promote his/her ideas above all others and an expert who wants to raise the level of discourse and bring in as many perspectives as possible. The WEA, unlike other professional associations in economics, explicitly welcomes non-economists (which include myself, I suppose). And, as Bustillos points out, these leaders in their fields will still play the role of the DJ, spinning the different ideas coming from all corners.

Pluralizing economics has been a goal of this blog from day one, and the benefits of this pluralism have been proven beyond a doubt through remarkable initiative like Wikipedia. Without hesitation, I encourage anyone reading this to join the WEA, get involved in the heterodox discourse, and help agitate economic knowledge for the better.

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I just finished reading John Quiggin’s Zombie Economics, from Princeton UP. I had read most of the book months ago, and then a number of things got in the way of finishing it. However, it’s an easy book to come back to because it is methodical in debunking the some major conceits of neoclassical economics and the associated policies. One of the reasons I was interested in this book in the first place is that Quiggin posted the chapters serially on his blog and received comment ahead of publication. The level of rigor and care is quite evident in the text- it goes without saying that this publishing strategy is an effective one.

There are five chapters, addressing what Quiggin sees as the five most dubious accepted truths in the mainstream: the Great Moderation; Efficient Markets Hypothesis; use of DSGE models; trickle-down economics; and Privatization. Each chapter has five sections- birth, life, death, reanimation, and after the zombies. This setup allows Quiggin to carefully explain the history of each idea, how each has been applied, and how to move beyond.

I most enjoyed the DSGE section, in which he takes on the predominant practice of a microeconomics-based approach to macroeconomics. Here, he probes the technical and philosophical assumptions of these accepted models, and shows how they were bound to failure in predicting the current crisis. In presenting alternatives, he shows how one can look to Keynes and seek models without a “coherent dynamic equilibrium concept.” Such models would embrace animal spirits, and eschew false attempts to simplify human behavior in pursuit of elegance. Quiggin also urges a return to Minsky in order to understand bubbles.

I had highest hopes for Chapter 4, which covered trickle-down economics. Here, I thought, Quiggin would unmask the class-based roots of the crisis, demonstrated by inequality and stagnant wages. He does talk about inequality a lot, and how political power has led to more of it and also the outsized growth of the financial sector (something like the Hacker-Pierson argument, but not articulated as such). He even debunks the notions that inequality leads to growth and that social mobility compensates for it. However, when discussing the real harm of inequality, he ends up falling back on the loss of autonomy it produces. I don’t want to downplay the importance of autonomy, but for some reason, the following paragraph annoyed me:

The points are clearest in relation to employment. Early on, Marmot debunks the Marxian notion of exploitation (capitalists taking surplus value from workers) and says that what matters in Marx is alienation. It’s the fact that the boss is a boss, and not the fact that capitalists are extracting profit, that makes the employment relationship so troublesome.

I’m not sure how Quiggin misses the fact that alienation and exploitation are tightly linked. Further, when one sees the divergence of wage growth and productivity growth in the last three decades, and the need for debt-based consumption it fueled, I’m not sure how one could conclude that exploitation and class don’t matter. I am beating a dead drum on this concept, I know, but it really seems to me that overlooking these factors is the critical conceit of economics, as most in the field assume that labor must simply take what is given to it. Thus, I’ve urged repeatedly for more worker-owned enterprises as a pathway to a new economy. A shift along these lines would address both alienation and exploitation, which is good because I’m not sure how one could address one without the other.

By eliding over exploitation, Quiggin naturally steers his policy pitch against trickle-down- the emphasis shifts to the outsized wages at the top (CEO pay), not to the stagnant ones at the bottom. The related (and wrong-headed) key political questions follow naturally, and emphasize tax reform. All told, in shooting down one zombie here, Quiggin seems to have reanimated one of the most important ones, that class is irrelevant.

Quiggin ends with a nice touch in his conclusion- he turns the financially-oriented notion of risk on its head by pointing out the great risks our society assumes by having inadequate safety nets and a privatization-first mindset. Put simply, “a social democratic response to the crisis must begin by reasserting the crucial role of the state in risk management…collective risk management through the welfare state helps to stabilize the aggregate economy.” Indeed, the tussle over the question has been the most marked in politics and economics in the last 30 years. We may need to settle it once and for all before moving on to the deeper structural tensions of our economy. Pointing out that opponent ideas are essentially “zombies” is a critical contribution here.

Finally, I enjoy Quiggin’s three simple propositions for economics, which he says should focus, “more on realism, less on rigor; more on equity, less on efficiency; and more on humility, less on hubris.” Though I think Quiggin may have missed something crucial in this book, he gets 95% of it right, and does so in a way that’s accessible for non-economists. His book is a great contribution to our understanding of the failure of economics, and a good start to putting the discipline on the right path.

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During the interwar period, there was no consensus on how economics should be done. There was no “orthodoxy”, but rather various competing schools of thought. In the US, for example, there were schools that did neoclassical theory, and there was also strong movement in American Institutionalism at universities such as Texas and Wisconsin. Today, there is a dominant orthodoxy, and that is neoclassical economic theory.

Many view this newfound orthodoxy a great improvement, from a state of “disarray” and argument to a more rigorous and exact science. However, I would like to argue that the pluralism that existed in economics during the interwar period was in fact healthy for society. It allowed for debates and conversation, and for trying new economic theories when other ones failed.

During the Great Depression, for example, neoclassical theories fell out of favor and Institutional economists flocked to Franklin Delano Roosevelt’s administration. There they were instrumental in structuring New Deal programs such as social security, unemployment insurance, and corporate laws such as the 1933 Glass-Steagall Act which included banking reforms that were aimed at regulating speculation. Institutionalists also began collecting the national income accounts and founded the National Bureau for Economic Research.

The problem that the Obama administration faces is that they do not know where to look for economists other than the ones who got us into this current crisis. Whereas during the New Deal the United States was a diversified place in terms of economic theories, today there is only one. That is why the same economists who got us into the mess are still advising the president: former Treasury Secretary Robert Rubin is an advisor to the president; Tim Geithner who was president of the Federal Reserve Bank of New York from 2003-2009 is now the U.S. Secretary of the Treasury under Barack Obama; Paul Volcker was chairman of the Federal Reserve under Carter and Reagan and is now chairman of the Economic Recovery Advisory Board. The list goes and on demonstrates the poverty of the current situation of economic theory in the United States.

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