The Commercialization Effect

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.

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Amartya Sen’s plight for history of economics

An interview with Amartya Sen:

I think a lot of economists were deeply impressed by the elegance of their models. These models describe an imagined economy where the markets functioned perfectly. In such an environment, the market achieves very good results and does not need any kind of state intervention. That’s a very elegant model. It was something which Adam Smith did discuss, but he discussed it along with all the limitations that must be borne in mind. Other early economists who used simplified models of this kind also stressed the importance of noting that the world isn’t anything like that. Edgeworth did that, Walras did that, Wicksell did that. Many modern economists take their simplified models too seriously.

In which ways do you think new economic thinking is necessary and how should it look like?

I think we need a bigger, more integrated view that economists tended to look for, in the past. We have to see the totality of the concerns that make human beings want a good economy. The kind of economic thinking that I would like to see pays a lot more attention to issues of human freedom. What I have in mind is real freedom, not just formal liberties but also what kind of lives people manage to achieve, what they can do with their lives, and what help of the state they need for more substantive freedom. The basic question economists should ask themselves is: What can we do to have a decent society where people get much more freedom to live the kind of lives of which they would have reason to be proud and happy.

You make a lot of references to old economic thinkers like Smith, Keynes and so on. However, if you look at the current economic research that is published in the journals and taught at universities, the history of economic thought does not play a big role anymore…

Yes, absolutely. The history of economic thought has been woefully neglected by the profession in the last decades. This has been one of the major mistakes of the profession. One of the earliest reminders that we are going in the wrong direction has come from Kenneth Arrow about 30 years ago when he said: These days, I get surprised when I find the students don’t seem to know any economics that was written 25 or 30 years ago.

Is there any hope that this trend can be reversed?

Yes, I’m quite optimistic in this regard. I get the impression that this seems to be getting corrected right now. I’m particularly delighted that the corrective has come to a great extent from student interest. I’m very struck by the fact that at the university where I teach – Harvard – the demand for more history of economic thought has mostly come from students. As a result there is a lot more attempt by the department of economics as well as history and government to look for the history of political economy. Last year, along with my wife Emma Rothschild, I offered a course on Adam Smith’s philosophy and political economy. It drew a lot of interest and we got some of the finest students at Harvard.

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What are economists for, anyway?

Rob Johnson at the Institute for New Economic Thinking asks a deep and important question: does the economist serve powerful interests or society?

The answer seems clear-cut. Economists today primarily serve the needs of powerful interests at the expense of society in general.

But why?

To answer this, Johnson peals back the surface of overt corruption to explain how the problem goes far beyond that. It was not that economists were all on the take leading up to the global financial crisis, Johnson says, but that those whose visions aligned with powerful financial interests “were used as marketing vehicles, and they were not adequately skeptical as scientists of what the flaws in their vision might be.”

“The world is always uncertain,” Johnson continues, “so when people become anxious, they want the expert to tell them what is going to happen.” The problem is that these experts don’t shoulder much of the risk of being wrong – or of selling confidence when humility is called for – and it is society that ultimately pays the full price of their deception.

Yet many economists don’t even see the problem. They don’t know – or don’t want to know – that they are selling snake oil and that the abstract precision of their finely tuned mathematical models doesn’t hold up to the many contingencies of the real world.

The solution Johnson proposes resonates with me: change the way economics is taught. Rather than use principles of economics to indoctrinate, use it so study the philosophy of economic science. Help students realize that an interesting and useful economics deals with politics and institutions and power and the good society. Ethics cannot be completely absent from the toolkit of the economist. Otherwise, they end up serving the interests of the powerful at the expense of society.

Then we can get to the real issue that the profession must confront:

Economists. What – and who – are they good for?

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The Economist as Public Intellectual

 

 

 

 

 

 

 

 

 

 

 

 

This weekend, Duke University hosted the annual conference of the journal History of Political Economy. This year’s topic was “The Economist as Public Intellectual,” and papers explored how economists become influential in policy and public debates, how they navigate the public sphere, and how influence or are influenced by various media formats. For those interested, selected papers will appear in the annual supplement to History of Political Economy.

The topic is fascinating and extremely important. However, here I only want to share one quote from 20th century public intellectual Walter Lippman. As an undergraduate at Harvard, Lippman took some courses in mainstream economics but was largely unimpressed: he did not see usefulness in such models of economic behavior. One aspect that he reacted to was the assumption, still largely used today, that economic analysis takes preferences as exogenous and given. Lippman found this assumption bewildering, writing that “Advertising is in fact the weed that had grown up because the art of consumption is uncultivated.”

I had not previous considered consumption as an art, but this might be a good way to think about it to make sense of the “mindless consumption” that some modern commentators make on our consumption-driven society.

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Worldly Philosophers Wanted

Rodger Backhouse and Bradley Bateman take an interesting look at how the teaching and research of the economics profession has changed [ht:av]:

IT’S become commonplace to criticize the “Occupy” movement for failing to offer an alternative vision. But the thousands of activists in the streets of New York and London aren’t the only ones lacking perspective: economists, to whom we might expect to turn for such vision, have long since given up thinking in terms of economic systems — and we are all the worse for it.

This wasn’t always the case. Course lists from economics departments used to be filled with offerings in “comparative economic systems,” contrasting capitalism and socialism or comparing the French, Scandinavian and Anglo-Saxon models of capitalism.

They point out that the big questions have left the discipline, making it difficult for economists to respond when big changes occur:

Perhaps the protesters occupying Wall Street are not so misguided after all. The questions they raise — how do we deal with the local costs of global downturns? Is it fair that those who suffer the most from such downturns have their safety net cut, while those who generate the volatility are bailed out by the government? — are the same ones that a big-picture economic vision should address. If economists want to help create a better world, they first have to ask, and try to answer, the hard questions that can shape a new vision of capitalism’s potential.

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Why Economics Must Loose the Shackles of Science

Much post-crisis navel-gazing in economics has concluded something like, “economists treated economics as a science, even though it isn’t,” or, “it’s more like biology than physics.” The implicit assumption is that the hard sciences are science wrought certain and unassailable. In his book The Blind Spot, William Byers belies that notion by speaking to the uncertainties that scientists often miss in their own field. I think this book is important for students and scholars of economics to read, though, because many of the points Byers makes can be said even more truly of economics than mathematics and the physical sciences.

Byers begins by addressing these disciplines within his scope head-on, drawing on the history and philosophy of science to show that whatever the subject, many “results carry a family resemblance. There are limits to what we can know.” He then puts forth a dialectic of science as certainty versus science as wonder, arguing that “coherence results from acts of creativity…[and] transcends classical objectivity and subjectivity.” I wonder where economics fits into this dialectic- what is an economics of wonder? Economics, for all of its faults, is often practiced by genuinely creative people who want to model the world to answer interesting questions. Likely, though, the limits come as economists seek what Byers asperses- certainty; economists may too often fall short because they limit themselves to questions that can be answered with the data or methods at hand.

Much of the body of the book is filled with engaging vignettes of the history of science, as well as philosophical digressions that frame key issues in similar dialectics. I won’t belabor it, because I think this book is not easily treated in a simple blog review, but I think the key takeaways for science are just as easily said for economics. For example, Byers discusses how the jump from mathematical equations to real world applications of those equations is often fraught with peril. I was intrigued by an article by Wolfgang Dreschler in the same vain that spoke directly to economics: “mathematics might be easily yet erroneously taken as the real kind of connection between objects.” Indeed, the relationship between model, variable, and real world is one often glossed over in economics, and apparently in hard sciences as well.

Byers’ conclusion has a lot to say for economics too: “human judgment must be reclaimed from those theories, ideologies, and mechanical systems than can be so intimidating…the world is uncertain and the problems are difficult…[but] the world of the uncertain is the world of creative possibilites.” Economics, especially as it is practiced in the mainstream, does not have a sufficiently robust philosophy of itself to justify any comparison to the hard sciences. However, the main takeaway we can gather from Byers’ work is that “science” isn’t a goal for a given discipline; rather, the goal is to exhaust all methodologies as appropriate, embracing uncertainty, and attempting to answer questions that matter, no matter how seemingly intractable.

For too long, economics has approached the questions that seem observable, hoping to offer a ceteris paribus answer in all cases. Reading Byers’ account of science’s own struggles should be informative and sobering against this approach. Quite simply, uncertainty will not allow it approach to work; we will get some answers, but they won’t be answers that compel the real world to act just so. Economics needs to put away its delusions of scientific grandeur, and instead aim to be useful and creative, not authoritative or universal.

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We have met the enemy and he is us

Today marked the end of the 2011 History of Economics Society annual conference, hosted this year at Notre Dame. There were many interesting discussions, and keynote lectures given by journalist John Cassidy and historian of physics David Kaiser. But here I want to focus on this year’s HES presidential address, annually given by the outgoing president of the society.

This year’s HES president, Jerry Evensky of Syracuse University, gave a lecture entitled “What’s Wrong with Economics?” His brief answer to this question is that we ignore what he calls the “Pogo Principle,” that is, that “We have met the enemy and he is us.”

As a scholar on Adam Smith, Evensky says that the problem with economics today are models based on “homo economicus” because there is no room for vice or virtue or ethical behavior. Unlike the conception of man that was used by Adam Smith, homo economicus has no norms.

This also relates to the lack of analysis of power and power structures in society. According to Evensky, power can be generated by both political institutions and socially constructed norms such as gender or race. Given the existence of power structures, unfettered competition will NOT be fair competition. Rather, “the powerful win in the race for wealth because they control the race.” But these concepts elude economists who use the standard economics toolkit of utility maximization. For Evensky, the value of a research toolkit is not in the answers it gives, but in the questions it encourages us to ask. By this measure, the neoclassical economics toolkit leaves much to be desired.

Evensky ended his talk on an even more troubling note. He explained how the history of economic thought course that he taught at Syracuse had been part of the core graduate economics curriculum when he went to work there. But, the department decided that HET course had a very high opportunity cost and should not be part of the core; in 2002 the course ended. This is not a trend that will help economists remember the “Pogo principle” in the future.

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Put the money back in economics

Perry Mehrling has a wonderful new book that advocates for the reintegration of money into macroeconomics. His claim is that neither economics nor finance have been helpful in understanding the current crisis because both abstract from money. By combining the history of economic thought into his analysis of the current economic crisis, Mehrling shows how by taking money for granted, the inherent instability of credit was lost in economic theory and the DSGE models of modern macro. In order to make macroeconomics more useful, the practitioners of the field will need to relearn how to include the story of money in their story of how the economy functions.

Perry has also started writing a blog, “Money View“, which will fit in nicely on our blogroll. The aim of the blog seems to be mostly to “read between the lines” of Financial Times articles. And then he also includes other fun items, such as a recent post that reviewed the film “Inside Job.”

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Influence of the Nobel prize

University of Notre Dame professor Philip Mirowski has been awarded, along with Avner Offer of Oxford University and Gabriel Soderberg of Uppsala University, a grant by the Institute for New Economic Thinking for “a research project to investigate the influence of economic doctrines on policy norms in recent decades through analysis of the history of the Nobel Prize in Economics.” From the press release:

The Nobel Memorial Prize defines high achievement in economics, and validates the discipline’s claim for scientific authority. And yet, historically, it can be understood as a reflection of domestic policy conflicts in Sweden. In the 1970s-90s, the prize committee was dominated by Assar Lindbeck, and lent authority to his domestic liberal policy agenda. Likewise, outside Sweden, between the 1970s and the 1990s, the prize tended to reinforce a market-liberal policy agenda.

The research project will analyze the extent to which the selection of a Nobel winner played a role in the advancement of theoretical and policy agendas in other countries, especially the USA.

There does seem to be an interesting story to tell about conflict between Swedish economists and their successful welfare state:

“The research problem focuses on the influence of economic doctrines that has worked to discredit government in the name of efficiency norms. The authority of the doctrines was enhanced by the creation of the Prize in Economics by the Swedish Central Bank, and more so after its incorporation into the Nobel procedure. The project strives to locate the origins of the Prize in the conflict between Swedish economists and their successful welfare state,” said Avner Offer, Chichele Professor of Economic History, University of Oxford. “The INET grant will make it possible for us to construct an economics citation database, to investigate Swedish-language source materials, to visit European and North American archives, to re-examine the work of the laureates, and to write up our findings for publication. This study will specify the role of the Prize in validating economic doctrines, and will provide a more skeptical overview of the achievement of economics since the 1970s.”

This is an important project whose findings could be very useful to the INET’s goal of returning economics to its core mission of guiding and protecting society.

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A mindless, gobbling beast of indifference

John Gerzema has a wonderful talk on TED about the “post-crisis consumer”:

His talk and article advance a rather optimistic view that the crisis has changed American attitudes, from being mindless consumers to mindful customers. For Gerzema, mindless consumption is what caused the crisis, and empowered post-crisis customers can get us on the right track again:

We are now returning to traditional values that dominated society and the marketplace in every period but 1990-2007. The Spend Shift is a return to sensibilities that define the American ideal of a balanced approach to household spending. Needs are prioritized, savings are emphasized and wants are satisfied only when the budget is balanced.

His talk includes some interesting results of the current crisis that exemplify this return to values of thriftiness and community: communities have become more important as support groups, volunteerism is up, people are looking for more durability in goods they buy (and are holding on to their cars longer then ever before), raising chickens in their back yards, the rise of local economies and local currencies, cooperatives that install solar panels on homes, etc… He also believes these demands from customers will encourage companies to be more socially responsible.

I certainly hope he is right when he writes that “Values like thrift, self-reliance and community are colliding with–and overwhelming–old lifestyles based on consumption, making America an emerging market of opportunity.” That sounds like a society we should try to create.

My concern is what this means for economic theory, which leaves no room for consumers to consider WHY they consume. Gerzema’s definition of the pre-crisis consumer sounds just like the economic agent of neoclassical models :

In the postcrisis age the term “consumer” is a demeaning stereotype of a mindless, gobbling beast of indifference–someone who ingests an endless abundance of goods and services without regard for consequence.

If only we could learn from the crisis to leave behind both our mindless consumption and the theory of that mindless consumption.

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