Lemon Aid

“When Detroit gives us lemons, we give them billions of dollars”

Jon Stewart

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Responsibility

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Whither History of Economic Thought?

Over at Adam Smith’s Lost Legacy (h/t Mark Thoma), Gavin Smith posts about how the discipline of economics has evolved in such a way that the relevance of its own history is in question. I’ve obviously been posting a lot about these sorts of questions in the last few months, so I’ll jump at this opportunity:

There is a debate underway among historians of economic thought on whether economists really need to study the history of ideas in what we may loosely term our discipline. Those economists who take the view that the history of economic ideas really has nothing to do with modern economics, point to it being unnecessary for ‘real scientists’ to read the works of Isaac Newton, and his lesser luminaries, so why bother with Adam Smith and the rest?

My views on this debate (I have not joined in, so far) are predictable. The physical world is fairly constant…Knowledge gains in hard sciences build upon earlier knowledge gains, and future knowledge gains continue the process.

Turning to economics – part of human sciences – it is quite different. We hardly know about past economic history; even recent history is controversial and is well short of arriving at a settled view. There are political views of economic behaviours – as far as I know, we do not have ‘leftwing’ or ‘rightwing’ carbon atoms – and we do not have a settled view on what constitutes economic society or on what would constitute a society that could be said to be the basis for all further societies without (controversial) changes.

My colleagues among the historians of economic ideas are debating, hotly, just now about what constitutes money. Unlike, the physicists, who agree on the role of gravity, modern economists are not so sure about the venerable role of money.

No wonder, that ideas of modern economics fall foul to the barely understood ideas of past economists, where they are not simply made up (as has been the fate of Adam Smith among many modern economists who assert his so-called ideas shamelessly without reading him). We may not need to read Newton’s Principia to add to the knowledge base (so far it has not let us down, though it has been improved upon safely because its foundations were so strong), but where did our ideas about money, for instance, come from, and where may our ideas about money be built on less secure foundations than the ‘certainties’ we were taught recently?

As economics was derived from political economy, shedding within a century, philosophy, sociology, anthropology, history, politics, psychology, and such-like, though, unfortunately not shedding mysticism, idealism, utopianism, and, eventually, all traces of real human beings, an imaginary world has replaced the real world.

Now, that there were great gains from this process is not disputed, of course, but questions arise as to the costs in what the great ‘gains’ do not explain. Apart from which there is genuine concern about the usefulness of the abstract when directed at policy-making in real human societies…

It is not as if modern economists are better fitted in 2009 to understand (stepping down from ‘to advise’) than their predecessors, already starting down the road we’ve travelled, in 1909 (or for that matter 1809). The current ‘global crisis’ has not produced a consensus among the brightest in our profession (Nobel prize winners stand on opposite sides with different prescriptions) as what should be (could be) done, even if the players in the mix of, say, the G20 were minded to accept whatever advice the equations would give them.

And that’s the rub. The players do not behave as the mythical Homo economicus prescribes, and neither do all the other players in all the levels below them. The aggregates in an economy, however expressed neatly in well-behaved functions, do not capture what the models require of them. And their authors are impotent to make them do so…

My colleagues among the historians of economic ideas are debating, hotly, just now about what constitutes money. Unlike, the physicists, who agree on the role of gravity, modern economists are not so sure about the venerable role of money.

No wonder, that ideas of modern economics fall foul to the barely understood ideas of past economists, where they are not simply made up (as has been the fate of Adam Smith among many modern economists who assert his so-called ideas shamelessly without reading him). We may not need to read Newton’s Principia to add to the knowledge base (so far it has not let us down, though it has been improved upon safely because its foundations were so strong), but where did our ideas about money, for instance, come from, and where may our ideas about money be built on less secure foundations than the ‘certainties’ we were taught recently?

I (also predictably) agree with Kennedy about studying history of economic thought. I think he also slips in some other interesting thoughts. First, it’s important to distinguish between studying the history of economic thought and economic history. He writes that economists cannot agree on even recent economic history- I think that is true in many disciplines, but I think that is a lot different from disagreeing, or being plain ignorant about, history of economic thought, which I think is actually more important in this discussion.

At the same time, though, what would a better grasp of economic thought offer? People would certainly misuse Smith and Ricardo less if they actually read it. Keynes would not have been left in a dustbin for decades. Would Marx enter the discussion? What about Veblen? I think the “how” of the history of economic thought is even more important than the “whether.”

One other thing- Smith talks about the policy disagreements and the inability to abstract ideas into agreed upon policies. Sometimes I wonder if economics should be a policy-oriented discipline at all. In fact, I also wonder sometimes if it should be anything other than policy-oriented. This gets back to the science vs. engineering debate (I think Greg Mankiw has an essay on this somewhere on his site). In general, though, I don’t know if any direction will allow economics to be as fruitful as it can be, and a lot of it goes to the ideological implications it carries. This might be economics’ biggest baggage relative to other social sciences, and certainly to the physical sciences.

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A Violent Downturn

This article investigates the relationship between the economic crisis and the recent spat of mass-killings, muder-suicides, and upsurges in domestic violence claims.

one study released Monday in Florida finds a link between domestic violence and economic tragedies like job loss and foreclosures. The Sunshine State saw an almost 40 percent jump in demand for domestic-violence centers, an increase related to the state of the economy, the study says. George Sheldon, secretary of Florida’s Department of Children and Families, calls the situation “the worst I’ve seen in years,” according to the Associated Press.

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Small Enough to Fail

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Some Links

No time to post (thesis draft due tomorrow). Here are some links to keep your cognitive functions running this Sunday afternoon:

EV: “What Use is Economic Theory”

Theory of the Mind

EV: Mathematical Formalism in Economics

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Springtime for Mao

According to the International Herald Tribune,  China is planning to stage a musical version of Karl Marx’s Das Kapital to entertain as well as educate the masses on Marxist Theory. They have even hired an economist from Shanghai’s Fudan University as a consultant for the musical. 

Be sure to keep an eye out for it on Broadway. 

It does makes one wonder what Marx might think of self proclaimed Marxist states such as the Soviet Union and present day China. He might characterize these economies as state-capitalism: still capitalism, but here the state is exploiting the laborer rather than the private capitalist exloiting the laborer. Certainly a contrast to our common notion of Marxism. 

Maybe we have a lot to learn about Marxist theory too, and perhaps a musical would not be the worst means to do so. But perhaps the Chinese verision will not do. As the article summarizes:

In the musical, workers discover that their boss has been exploiting them and then learn about Marx’s surplus theory of value. Some react by passively accepting their fate. Others organize and use their collective strength to bargain with the boss. A third cohort mounts a revolt, only to cause the entire business to fail.

The moral of the story — that today’s workers must not revolt against the new ruling class — would give Marx apoplexy. But so it goes when the dialectic is set to music.

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A Little Fun With Rhetoric

Compare and contrast…

Paul Krugman in today’s NYTimes

But it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic.

Karl Marx in the Communist Manifesto

Modern bourgeois society, with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells.

Just to be clear: I’m not trying to imply that Krugman is a Marxist/communist/socialist/actual leftist.  This is just a playful comparison of rhetoric…

Interesting, though…

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“Will Unload Toxic Assets For Bonus”

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Why do you build me up, Mark Thoma, baby…

just to let me down and mess me around?

Mark Thoma has a followup to his earlier excerpt post of the article I posted below. When it showed up in my Reader, I got all excited and such. But, like Tony Macauly of The Foundations, I feel a little used.

Let me preface this by saying that I imagine Thoma has more thoughts about the article than what he posts, and that as a macroeconomist, he is merely trying to speak to the parts of the article related to his expertise. The problem is, by my reading, these were not the most important parts. Thoma writes,

First, academic economists have taken a lot of grief for not predicting the crisis, but realize that very few academic economists do forecasting. There are two uses of economic and econometric models, one is to use the models to understand how the world works, the other is to use the models to forecast. And while, of course, one of the goals of understanding the economy is to be able to predict it, it is simply not something most academic economists do…

Second, the economists who do forecasting need better data. If we are we are going to forecast the immediate future accurately, we need data that are timely and informative…

But there must be some way we can get a better picture of what is going on contemporaneously than we have now, and I think we need to investigate how to make that happen. The data as they exist now are fine for academic researchers who are looking backward and do not necessarily need the very latest months worth of data, though even in this setting this is sometimes a problem, but for forecasting our data are inadequate…

I do think it’s something we should put some thought into, and if there’s a way to do substantially better at getting an accurate picture of the current economy than we have now, something that would be of great benefit to policymakers, forecasters, and people trying to make economic decisions in the private sector, it would be well worth pursuing.

Maybe this data stimulus would be worth pursuing, but I have a couple points in response:

1) Kaletsky’s argument concerns the models and their assumptions, not just the fact that they were wrong. Academic economists, by building models, enable the forecaster to wreak havoc, in so far as these models and assumptions suck, which seems to have happened.

2) What about Taleb’s black swans? How would better data deal with that?

3) Macroeconomics is not crisis-oriented anyway, and again, that goes back to the models.

So, I think Thoma (whom I really respect, given that he has at least 5 more years of education plus around 20 more years of experience than I, not to mention a few years of blogging experience) is missing the point to a degree. I hope he enters into a dialogue with other aspects of Kaletsky’s argument in future posts.

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