Archive for April, 2010

New feature for the Friday links- a quick roundup of the week’s posts, for those of you who aren’t subscribed (I’m stealing this gambit from Ezra Klein at WaPo). It was a busy week; we talked about: obesity as a function of society; Sen’s new manifesto; taking on Paul Krugman on epistemic closure; reposting Ruccio’s response to Sen’s manifesto; Notre Dame’s academic forum on economics and ethics; parody– betting against the American dream; taking on Max U; redefining fiscal sustainability; rounding up Max U comments; and why environmentalists don’t trust economists. I’m curious for feedback from both sides on this last post. No more ado, though- here are your links.

Serious Links

Amartya Sen on Adam Smith (in video form)- Maxine Udall

Chris Hayes compares financial malfeasance to looting- The Nation

Why the EPA should regulate carbon- The Nation

Ezra’s interview with Lindsey Graham on immigration and climate change- Washington Post

Steve Randy Waldman breaks down the Goldman Sachs fraudulent deal- Interfluidity

Ingrid Robeyns argues against Sen’s redundancy claims on justice- Crooked Timber

John Bellamy Foster interviewed on Marxist ecology- MRZine

Noam Chomsky says the US could broker peace in Gaza, but has chosen not to- TomDispatch

Matt Wasson says a new law is needed to supplement new EPA rules and end mountaintop removal coal mining- Grist

Is the Gulf oil spill going to be worse than Exxon-Valdez?- BBC


George Costanza: The Movie (best two minutes of your day, I promise)

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I’ve written a lot here about climate change and environmental economics, trying to point out weaknesses and blind spots in the cap and trade approach. Before I digress, then, let me say that I think getting ACES passed through the Senate would be a step in the right direction. Just like health care reform, I’m aware of the political limitations, disappointed in the state of the discourse, but realizing that right now, something better isn’t possible (unless, of course, the EPA shows it’s willing to get the job done without Congress- then, that would be preferable).

Today, though, 5 environmental groups said that the Senate bill simply isn’t good enough- it’s a step in the wrong direction. Let’s not over-interpret this. Tuesday, 31 environmental groups came out in favor, as the article notes. Nevertheless, I think opposition to the bill from the “left” demonstrates tensions between environmental groups and economists, and I find myself quite sympathetic to the environmentalists. Environmental Economics argues that these tensions should be set aside, that environmental economists are on their side:

Writers like David Roberts and Bill McKibben, who routinely characterize mainstream economics as somehow antithetical to environmental concerns, are inadvertently spreading the exact narrative that the Right wants everybody to buy into…The overwhelming majority of mainstream economists favor stronger environmental regulation on many fronts, especially climate change…The public needs to know that most of the leading minds in economics come down squarely in favor of strong climate change legislation, as well as efforts to improve water quality, clean air, and biodiversity protection.

I don’t disagree with much of what he says, but I think that the author ignores the root causes. Before I get into that, I’d like to highlight Frank Ackerman’s post at RWER about underestimating the social cost of carbon:

So far, the administration’s interagency working group that has been studying the SCC has come up with a range of values, with a “central” estimate of $21 per ton of CO2 in 2010, or roughly 20 cents per gallon of gasoline. Over time, the SCC would rise, but only to $45 per ton (in 2007 dollars) by 2050…

But this doesn’t need to be the last word. In fact, it absolutely shouldn’t be, because the analysis that led to that number is based on deeply flawed economics, omissions, and poor value judgments…

For starters, it relies on an overly narrow review of climate economics, relying on a handpicked set of models — FUND, PAGE, and DICE — that happen to produce very low SCC estimates. All three models have serious problems…

We also found that the working group was aggressive in “discounting” the value of future costs, considering rates of 2.5 to 5 percent per year that trivialize future damages…

A last and very serious concern is that the SCC calculations don’t take into account the small but hugely important risk of catastrophic climate damage…

There are too many open questions in the SCC calculation to recommend a precise alternate value based on the information now available; there is a need for more extensive research, examining the full range of available studies of climate damages and costs, and analyzing assumptions about the risks and magnitudes of potential climate catastrophes. In the United Kingdom, where carbon pricing and cost calculations have a longer, better-researched history, the latest estimate is a range of $41 to $124 per ton of CO2, with a central case of $83.

I don’t think Ackerman’s concerns can be easily explained away, and I’m willing to duke it out in the comments over each assertion. The upshot of his assertion is that there is a lot of play in these models for a number of parameters. Sure, we could take the three issues (climate model, discounting, and fat tails) and produce a 3-D table of SCCs under every permutation. We could even take the middle estimate in each parameter, get our number, and go home- it would probably end up a lot higher than $21/ton. However, that still wouldn’t get to the heart of it.

The problem is that economists, as the go-to people on this issue lately, are being asked to make “value judgments,” as Ackerman rightly puts it, on these 3 issues. And they are value judgments- I’ll argue that one too. Economists should not be deciding what the future is worth, what the value of a catastrophe is, or the relative value of a life across countries. So, even if most environmental economists got in the game because they love the environment, they’ve been corrupted by the play in these parameters, and the ease with which their assumptions can generate a nice number (I’m not trivializing their models, which were undoubtedly the fruits of hard labor of thought). They can assume whatever to generate the number that “looks” right, i.e. gets something done and is politically feasible.

But that’s not the role of economists. The role of economists is to allow the debate to center where the center actually is. By making choices they shouldn’t be allowed to make, they force environmentalists to compromise twice: once to get the number that “looks right,” and then once again when the politicians bear their claws and create a neverending set of loopholes. I suppose having written all of this, and working up quite an angry sweat, I’m something of an environmentalist. I don’t have any beef with environmental economists for the work they do- rather, it’s their place in the system, and how their work gets used, that I tend to oppose. It’s the system, man. It’s unfortunate, but that’s why environmentalists don’t trust economists.

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I’ve found a number of the comments on my post about utility maximization to be helpful and clarifying, and I’m convinced as ever that we need to throw it out. I’m mainly focusing here on posts that either confirm or deny my assertion that it should be thrown out, and leaving out the certainly relevant and helpful comments on why economists rely on it/what it implies.

First, Tom Hickey wrote:

the subliminal worldview of most people is not internally consistent, because it is not consciously constructed or intentional arrived at. A lot of people don’t pursue goals that they would if they had different norms, for example.As a result, most people are conflicted much of the time. They control their “base nature” through the imposition of value-structures, religious and moral codes, ethical standards, and positive, for example, and this is an internal conflict that manifests in decision-making. Some of these decisions are economic choices that are not necessarily utility maximizing in the rather simplistic way that many economists consider, e.g., pursuit of self-interest.

Kevin disagreed with both Tom and me:

On the other hand, assuming someone doesn’t maximize over preferences seems very, very strange. Surely we are guided by passions, but we are not machines. To the extent that we have what philosophers call “human agency”, then we are attempting to do what we think is best for us. That simple idea turns out to be a very powerful paradigm of the world…

 Social science is too complicated to know *exactly* why something happened. As such, our models will, by definition, be wrong sometimes. A better criteria for models is whether they are useful!

And later:

Note further that max u does not require people to do what’s “in their best interest”: as an economist, I don’t even know what term could mean. I only care that they have some preferences and maximize over them, harmfully or beneficially.

Even if you find that restriction too strong, max u may still be salvaged to the extent that most economic models only care that people act “as if” they maximize utility…I think it’s madness to say that humans aren’t purposeful. It is very, very easy to get people to react to incentives

David Youndberg jumped in:

I’m surprised you say “it’s hard to argue that individuals are maximizing anything.” People are maximizing things all the time! They buy more during sales…

Does this risk being tautological? Perhaps, but if you want to expand the number of things economics explains, that’s a natural danger.

My reply:

This fallacy, that humans are so purposeful, is what is woefully misguided. This may be a cheap shot, but I think the main reason it persists is because people who are attracted to economics tend to act so “purposefully” themselves…

I meant to say, they aren’t consistently maximizing anything, at least not in a measurable way…The tradeoff of simplicity for a tractable model is not a worthwhile one when the model turns out to do an awful job of predicting how the economy actually works. Yet economists cling to it…

I was too strong when I said humans aren’t purposeful. I meant they are not consistently purposeful. They also consider a host of changing norms and ideals that cannot be modeled. These things can neither be measured (at least right now) nor assumed away.

Finally, I think Sandwichman really brings it to the table. His comment is the sort of thing I would like to write if I understood these things much better:

The gestalt theory of figure and ground is apt here. What counts as figure and what counts as ground is a cognitive choice the mind makes based on subjective experience. Maximizing utility is something that only occurs after we’ve identified what we think the figure is. The illustration of Rubin’s vase demonstrates what happens when the information is ambiguous and could be read either way. It’s also a simplification in that the ambiguity is only two-way. There can also be multi-layered ambiguity. This is what people mean when they talk about uncertainty.

Kevin presents a very articulate defense of utility maximization that sidesteps the fundamental nature of uncertainty. It’s not a matter of satisficing meeting the criteria of maximization, it’s a matter of not knowing and not being capable of knowing what one’s preferences are. The problem with neoclassical economics is that economists have picked some trivial examples of consumer preference and generalized from them. It seems intuitive if you’re talking about preferences between, say, beans and brocolli. The whole preference ordering game works there only because… it doesn’t really matter. For all intents and purposes it’s “reversable”.

On big ticket items, though (things like career, life partner, domicile), the distinction between figure and ground is fundamentally uncertain. Economists have swept that huge difficulty under the rug by treating these as a “normal goods” the preferences for which can be modeled by generalizing from trivial and totally dissimilar examples of commodity preferences. Even the choice between war and peace can be trivialized to choosing between guns and butter.

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Update: As I hit post, I realized that billyblog has links to video, running transcripts, et al. from the conference. Soak it up.

I got to attend the first discussion session at the Fiscal Sustainability Counter-Conference today, which was led by Bill Mitchell, who blogs at billyblog. If you read the comment threads here, then you’ll be familiar with the arguments. Basically, because governments issue fiat currency and collect taxes in that currency, they can afford to deficit spend as much as they please. The goal, the panelists argued, is full employment. Deficits are not costly- instead, allowing a key productive asset (labor) to go underutilized is an unrecognized huge opportunity cost. The government can spend and hire so long as there are enough resources to tap into. The government must balance the private sector, which does not always do its job.

I find these arguments compelling. They stem from the growing field of modern monetary theory, about which I’m learning more with every passing week. It’s becoming clearer to me that deficit and debt hysteria, is exactly that. Of course, the dialogue in our country is so far to the right in this debate that these ideas find little airing. “Serious” economists are required to sabre-rattle about deficits, and propose solutions for decreasing them- full employment is an utter afterthought.

Mitchell pointed to Australia, his home country, as an example of the opportunities that exist. By pursuing what amounted to full employment policies in the 1950s, the government grew the economy, and budget deficits did not strangle anything. The OPEC scare brought an end to these policies, but under false pretenses, as the supply constraints were completely exogenous to the budget situations of governments. Nevertheless, fears of inflation, which Mitchell and others argued is only a threat under full employment, have prevailed such that decades later, the rhetoric of deficit hysteria still dominates.

Mitchell and others argued that a real marketing campaign needs to occur- I suppose this is my contribution to it. Possible memes to spread the word: we don’t owe the debt, we own it; for the non-government sector to run a surplus (or save), the government must run deficits. At the country level, clearly some, if not most countries, must run deficits. I think the opportunity cost line of thinking may be another way to reach economists.

So, this is the agenda for full employment. I know there are counter-arguments to this line of thinking from both the left and the center, but those are for another day. As hard as it is to reason with neoclassical economists on these issues, it will be even harder to reason with politicians. However, that’s a fight I don’t really want to think about right now.

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Update: I try to synthesize the comments from this post here.

Warning: this post is long, but hopefully thoughtful and at least somewhat original. Also, if you’re new to the blog, subscribe in the upper right hand corner via RSS. Check out my recent posts on epistemic closure and fiscal sustainability.

At an off-campus discussion toward the end of my senior year of college, the topic of behavioral economics came up. Leading the discussion was a professor of mine, David Ruccio- whose blog I link to regularly- who argued that to really move forward with these iconoclast ideas, we still have to get rid of the max u thing- it’s holding everything back. I didn’t really agree with him at the time, or I just didn’t know, but a recent panel I attended helped clarify why Ruccio, and other heterodox economists before him, are right, even if the panelists themselves don’t want to see it it or admit.

The topic of the panel, hosted by the Brookings Institution, was “Happiness in a Time of Uncertainty.” The panel was striking in it’s premise- 4 mainstream economists discussing the topic of subjective well-being. A number of interesting points were raised. For instance, it was pointed out that people seem to be very adaptive with regards to happiness, such that they can settle into what one might consider a “bad” equilibrium but regain subjective happiness, and thus show little incentive to leave.

CAROL GRAHAM: But there is one major complication or a fly in the ointment so to speak, and that’s adaptation. People seem to be able to adapt to high levels of adversity, poor health and all kinds of things and retain their natural cheerfulness or their natural happiness…People really can adapt to adversity. They also adapt to prosperity. As I thought about this around the world and how it aggregated up across societies I thought it’s probably really good from an individual psychological perspective that people are able to adapt to adversity and maintain their natural cheerfulness, but it may also result in collective tolerance for bad equilibrium.

The comments from panelists also touched on what behavioural economics has been saying for a while- people do a lot of things that don’t seem to be maximizing anything; there are myriad inconsistencies across time and across situations.

During Q&A, I raised the issue that these points seem to undermine the whole utility maximization assumption, and that we may need to completely overhaul the so-called microfoundations of neoclassical models (EJ Dionne, the moderator, called it an “attack on old-fashioned economics). Here’s the exchange, copied from the event transcript (pdf):

Q: A lot of the comments that all of you have made point to the idea that people don’t really seem to be maximizing happiness or utility at least not in measurably consistent way. Thinking about theoretical economics, how do we continue to go forward with neoclassical models that are based on a maximizing utility assumption?

ALAN KRUEGER: Behavioral economics is an important and growing branch of economics. It’s been recognized. Daniel Kahneman won a Nobel Prize for his work on the limits of people’s decision making. I think the real challenge for economics is to know when to apply lessons we’ve learned from the psychologists and when to return to revealed preference. I’d also caution on how we define utility because I don’t think happiness is utility. Maybe it’s an element in the utility function along with some of the other emotions that I mentioned before like spending time in a good mood or not being angry all day long and so on. I think we need to be careful not to equate our measures of subjective well-being with utility, and at the same time I think we have to be very careful to define utility in a way that’s not tautological because often the way some of our colleagues in economics define utility, it’s impossible to reject and what I think the work of Kahneman and others has shown is that people will make inconsistent choices depending upon the way that they’re framed. You can change the parameters and they’ll make choices which were not consistent with choices that were their interests before, so I think it’s possible to demonstrate that people don’t always behave in correspondence to the axioms that are necessary for utility maximization. But at the same time I think our measurement of subjective well-being is at a relatively early stage and I would be very cautious about going too far in the direction of equating well-being with utility.

KAREN DYNAN: I’ll just jump in and say I think Alan did a nice job of describing both the potential good that’s going to come out the behavioral research and the complications. I’m not a person who believes we need to throw out everything that we’ve been working with. I think if we could have incorporated cognitive limitations and information costs and biases into our standard models we could have gone a long way toward avoiding what we’ve been through in the last couple of years.

EDUARDO LORA: My only reaction to that question about the value of standard economics given all these developments I think is very much along the lines of what Alan said. I don’t think that we should throw away what we had. What these new developments lead us to is to understand phenomena that were important for people’s well-being that could not be related with standard economics and that’s precisely why I see that this area of public goods is so important and so amenable to this approach because certainly the way that we economics were trying to approach many of these problems of public goods didn’t go anywhere, they were just approaches that were too convoluted, while this view provides an approach that is very simple and really takes you very far. So I think that the toolkit of economics is a very powerful one and I don’t think that it’s to be discarded with these developments. I think it’s going to be complemented with these developments and I think that there is a strong consensus in the profession about that.

CAROL GRAHAM: Quickly let me echo what everybody said that you can’t throw out the baby with the bathwater on this one particularly because even though we found a great way to think about things differently and to identify quirks in the way people make choices and all kinds of irrationality, we still I don’t think have a lot of questions answered for example about the definition of happiness, how does happiness relate to subjective well-being and all the domains that Alan mentioned, which ones matter more, what definition of happiness do we care about in the policy domain. So it’s a new tool, it’s great, but it’s not ready to replace everything and I think it will always be an important complement and may make us rethink some of our traditional tools.

The point of my question was not that happiness should replace utility. It was that, if as these panelists had noted, adaptiveness in terms of happiness is natural, it’s likely that adaptiveness occurs in other elements of the utility function. Utility maximizing behavior in one time period may give way to a more indifferent, “just get by” strategy, in another. My Game Theory prof once defined rational as “strategic”- however, people aren’t necessarily strategic. Instead of maxing, they may just satisfy- get just enough. How do we model this? To stick with reasonable premises, I think we have to throw away that whole thing. Looking at how individuals actually behave, with which both the happiness economics and behavorial economics literature helps us, it becomes hard to argue that individuals are maximizing anything. If we do cling to this argument, it’s more likely that we are merely defining utility in a way that Krueger appropriately terms “tautological” (and warns against).

The panelists’ responses are striking in another way too- they see hope for behavioral economics as a way to tweak the inputs into utility maximization function. It’s not that surprising, though, that mainstream economists can be a defensive bunch- they’ve spent many years learning the maths and plying the trade, and each in this group has achieved significant status by using these sorts of tools (although Krueger was nearly rendered apostate by challenging the notion that a minimum wage will reduce employment, and Graham spent years trying to make the concept of studying happiness credible). Each of their responses referred to these sets of tools, and if we abandon the assumption of utility maximization, it makes the standard models useless, as it introduces untold degrees of heterogenity.

This sort of denial is frustrating to me, because behavioral economics is becoming more accepted in the mainstream and it makes clear that people do not behave in rational or predictable ways. However, making that next leap is difficult because there is an inconvenient consequence of throwing away max u (not just the loss of the “toolkit”). The degree of complexity that removal would introduce would chip away at economics’ drive to become more like physics. A recent paper (h/t Economic Logic) discusses this phenomena, pointing out how entire theories can blossom from any one unrealistic assumption:

And much of the economics and finance literature since Foundations has followed Samuelson’s lead in attempting to deduce implications from certain postulates such as utility maximization, the absence of arbitrage, or the equalization of supply and demand. In fact, one of the most recent mile- stones in economics—rational expectations—is founded on a single postulate, around which a large and still-growing literature has developed.

The authors rightly criticize the excessive mathematization of economics, and they argue that a large degree of uncertainty should be incorporated into models.

By acknowledging that financial challenges cannot always be resolved with more sophisticated mathematics, and incorporating fear and greed into models and risk-management protocols explicitly rather than assuming them away, we believe that the financial models of the future will be considerably more successful, even if less mathematically elegant and tractable.

So, however troubling or intractable it may be, I think economists need to pull themselves away from the max u assumption. It may result in a complete trashing of their neoclassical model. It may even result in a situation where microfoundations are no longer the basis for our macroeconomic thought. However, being wedded to unrealistic assumptions, falling prey to methodological individualism and methodological utilitarianism doesn’t get us anywhere. It preserves the status quo of poor models with poor conclusions that ultimately harm people. There are a number of ways in which economics does this, but let’s start by doing away with the most basic methodological one.

Let me hear it- what am I missing here?

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Just in case anyone missed Bet Against the American Dream, I thought it could offer some levity amidst Goldman’ s Senate hearings today. [ht:cr]

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For the benefit of those who have not yet begun to follow his blog, here’s David Ruccio taking my bait on Sen’s recasting of Smith. I have just a small comment below.

Mainstream economists cite Adam Smith’s Wealth of Nations as the founding text of modern economics. But, as I’ve mentioned before, while they often cite the Wealth of Nations, they rarely read it, and they certainly don’t read it in conjunction with Smith’s other great book of moral philosophy, the Theory of Moral Sentiments.

That’s an error Amartya Sen sets out to correct—in his most recent “Manifesto”and as far back as his lectures On Ethics and Economics. Sen reads Smith against the grain of contemporary mainstream economic thought, both inside the academy (in the form of neoclassical economics, who celebrate free-market capitalism) and outside (for example, the views of right-wing politicians and bankers, who rail against any and all government interventions into markets).

And, for the most part, Sen gets Smith right: It’s important to read the Wealth of Nations in conjunction with and against the background of the Theory of Moral Sentiments. Capitalist markets operate not only on the basis of self-interest but other motives, such as humanity, justice, generosity, and public spirit. Smith was in favor of government programs, such as free public education and poverty relief (after discussing, in some detail, the mind-numbing drudgery of factory work), and suspicious of capitalists’ arguments that their projects were always in the public interest. He was opposed to colonial restrictions (although not against the civilizing mission, for the rest of the planet outside Western Europe, of capitalist markets). And so on.

That’s why Sen finds Smith’s vision to have “a remarkably current ring.” Capitalist markets need trust and sympathy, in addition to self-interest; capitalist markets create class divisions and are not an Eden of equal opportunity. It’s a testament to how much toward the authoritarian Right mainstream economic thought has moved—in terms both of celebrating free markets and of attempting to eliminate all other forms of economic theory—that Sen’s Smith appears downright progressive.

But, as Nick notes, there is much that is missing from or overlooked within Smith’s attack on mercantilism and celebration of the rise of commercial capitalism. And much that Marx was critical of when he read Smith in the British Museum and started to write Capital.

Let me mention two such criticisms. First, he took issue with the idea that there was a natural and universal “propensity to truck, barter, and exchange one thing for another.” Instead, Marx argued (especially in the section on commodity fetishism) that the set of characteristics that allowed human beings to engage in commodity exchange were a historical and social creation. There was nothing natural and universal about them.

Second, Marx criticized Smith’s theory of value. While Marx engaged Smith (and classical political economy generally) on the basis of the labor theory of value (which, of course, neoclassical economists rejected, in the late-nineteenth century), he showed that the adding-up theory of value (according to which wages, profits, and rents could be explained as the rewards to separate factors of production, labor, capital, and land) could not explain the origin of profits as surplus-value. Once Marx distinguished labor from labor power, he was able to demonstrate that wages came from necessary labor and the rest, profits and rent, from surplus labor. Capitalists appropriated surplus-value (some of which were then retained as profits, the rest distributed to landlords) for doing nothing. That became the basis of Marx’s theory of exploitation.

In general terms, Marx started his analysis where Smith left off, with the wealth of nations. Here are the first two sentences of Capital:

The wealth of those societies in which the capitalist mode of production prevails, presents itself as “an immense accumulation of commodities,” its unit being a single commodity. Our investigation must therefore begin with the analysis of a commodity.

That’s the problem with Sen’s economic manifesto. He stops with Smith instead of starting there; he attempts to apply Smith to our times instead of developing a critique of Smith for our times. He wants to add trust and sympathy to unbridled capitalism, and not to take the next step—of understanding capital as a social relationship, and of abolishing it.

I’ll just add that most economists only use Smith as a philosophical, not methodological, starting point. Smith’s theory of value has virtually no bearing on the economics done today- it’s been replaced with a utility/profit maximization framework, which warrants a post for another day (hopefully Wednesday). Why bother with the critique when you’re not really bothering with the original text itself?

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This one is almost too easy. Krugman charges freshwater macroeconomists with epistemic closure. He writes,

Ask a grad student at Princeton or MIT, “How would a new classical macro guy answer this?”, and the student can do it; classes at freshwater departments teach real business cycle theory, and good students can tell you what it says even if their professors have a different view.

But students at freshwater schools — or, alas, many of their professors — can’t return the favor. It’s been painfully obvious since the crisis broke that people at Minnesota, or even many people at Chicago, have no idea what New Keynesian economics is all about. I don’t mean they disagree, or think it’s garbage, they literally have no idea what the concepts are. And that’s why they reinvent 80-year-old fallacies when they try to discuss the subject.

It’s interesting to ask why this sort of cocooning is a feature of the right but not the left. But it’s very real, and has a dire impact on economic as well as political discourse.

Of course, we can just as easily replace salt-water students in this analogy with students of heterodox economics/political economy, and freshwater economics with the whole mainstream. For instance, ask a post-Keynesian or a Marxian to hold court on IS/LM, and they can do it easily. This is not because these economists are heroic; instead, they realize that is essential to build a counter-theory by learning the original theory and its critique.

My course in Marxian political economy began with a reschooling in intermediate micro and macro- we actually learned this stuff better a second time by being forced to think critically about it. However, ask Krugman or his friends at Princeton and MIT about the starting point for Marx’s critique (hint: use-value versus exchange value) or Polanyi’s (hint: embeddedness) and I fear their eyes might glaze over. If the mainstream response to my argument is that the aforementioned critiques are not “serious economics,” well, we no longer have anything to talk about.

P.S. (private message for David Ruccio)- since I’ve dispensed with this one easily enough, hopefully you can take some time to follow up on my post re: Sen/Smith.

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Mark Thoma links to Amartya Sen’s “The economist manifesto” in the New Statesman. The key point:

The spirited attempt to see Smith as an advocate of pure capitalism, with complete reliance on the market mechanism guided by pure profit motive, is altogether misconceived. Smith never used the term “capitalism” (I have certainly not found an instance). More importantly, he was not aiming to be the great champion of the profit-based market mechanism, nor was he arguing against the importance of economic institutions other than the markets.

Smith was convinced of the necessity of a well-functioning market economy, but not of its sufficiency…

I like this bit as well:

He emphasised the class-related neglect of human talents through the lack of education and the unimaginative nature of the work that many members of the working classes are forced to do by economic circumstances. Class divisions, Smith argued, reflect this inequality of opportunity, rather than indicating differences of inborn talents and abilities.

And to conclude:

Smith’s analyses and explorations are of critical importance for any society in the world in which issues of morals, politics and economics receive attention. The Theory of Moral Sentiments is a global manifesto of profound significance to the interdependent world in which we live.

Sen’s breakdown passes Gavin Kennedy’s eye test, which is good enough for me as to whether Sen “got Smith right.”

It should be read by all readers of Lost Legacy (Follow the link).

Amartya Sen presents the authentic Adam Smith and corrects the mistaken views of many modern economists and their interpretations of his moral philosophy and political economy.

Sen certainly does an excellent job laying to waste uncritical mis-readings of Smith’s work. However, he does not venture into deeper critiques of the theory of value underlying Smith’s economic philosophy- one might rightly argue that this was not the point of this particular article. Nevertheless, I find it interesting that Sen points out the even more oft-ignored discussion of class in Smith, but does not raise the Marxian specter. Smith’s discussion of class divisions can be seen as a starting point, but it’s Marx who uses class as a basis for his entire theory. There is surely some value to be added here from bringing in Marx’s theory of class and of value.

Unfortunately, I’m not going to be the one to add that value right now. Perhaps Kasey or David can jump in in the next couple of days, since I’m tired and lazy and have another post I reeeeally need to write.

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