Open Thread 3: Economics is not the Economy


Open thread/rant. Responses and red herrings equally welcome.

Yes, I am intrigued and impressed with the various protest movements of this year, notably the Rotundaville occupation in Madison and the Wall Street group, which I have been watching with interest. I am happy that people are looking at the future once again, and trying to plan out a trajectory. And I don’t think this site could have launched when it did without engaging with the movement and its concerns.

Like everyone who has only had a chance to observe from a distance, though, I find it hard to gauge the radicalism of the movement, and I am concerned about being typecast as anti-capitalist.

Meanwhile, I remain an intense skeptic about most kinds of economic thinking. I believe that the climate community MUST be tolerant of a barrage of challenges, because I can’t tolerate a world in which comparable charges cannot be made about economics as an academic theory.

The word “capitalism” is a bit of a mush. If I sell you an egg from my chicken, am I a capitalist? Or do I have to be a devotee of Ayn Rand? Let’s avoid the word.

Here I use “corporate capitalism” as a social organizational principle; a way to build organizations that are competitively structured to use very high levels of organization while competing in the marketplace.

A couple of principles that I think many scientifically minded people would agree to, which the rest of the world might not:

– The problems we are facing these days are problems of success, not failure

– The corporate capitalist system is incomparably brilliant at solving certain types of problem

– The problems we need solved include ones of the sort where corporate capitalism is indispensable

yet

– The delegation of rights to inanimate corporations has resulted in an inhumane and distorted social structure

– Lack of friction on introduction of new technologies leads to increasing social instability

– Distribution mechanisms that rely on a labor scarcity to work, unsurprisingly, fail horribly when there is a labor surplus

So these are among the major misdesigns that need fixing, but we can’t be throwing out the baby with the bathwater.

But when I say “economic theory” needs replacing I am speaking of something completely different. There is an academic discipline which has enormous influence over the political sector, which they have obtained by claiming expertise which they do not have. Not only do academic economists consistently distort the decision making process, they also cause the value of expertise to be discounted among the political/administrative types.

Nobody believes experts, but most of the experts they run into, aren’t. Recognizing and weighing expertise is really the name of the game, in a way. So far we are not good at it.

But the whole tangle where anyone objecting to anything is assocaited with Stalinists makes me suspect for even saying this.

So let me make it clear. I like corporate capitalism in practice, even though right now it is broken. I think it is necessary, and useful. even if it, and especially its relationship to the rest of society, needs to be fixed.

It is a different matter when I say I don’t like any sort of economic theory I have seen; left, right, green, or grey.

I am not advocating a workers’ collective. I am advocating for better economists.

mt


Image: Thread Level Orange by Paul Wicks (CC-BY-SA-2.0)

Comments:

  1. Here are a few attempts by academic economists:

    Optimal Taxation in Theory and Practice
    N. Gregory Mankiw, Matthew Weinzierl, and Danny Yagan

    H.P. Young
    Progressive Taxation and the Equal Sacrifice Principle
    J. Public Econ. 32 (1987) 203--214.

    H. Peyton Young
    Progressive Taxation and Equal Sacrifice
    The American Economic Review Vol. 80, No. 1, Mar. 1990

    Mankiw et al. starts with some economic principles (of whateer merit) to survey the consequences for tax policy and then proceeds to note that to some degree actual tax law has moved in the direction of those principles suggest.

    The first paper by Professor Young demonstrates that at least one academic economist knows some by god functional analysis; I had thought that beyond the practioners of that acadenic professor (other than Professor Arrow, of course); I'm pleased to find I am wrong one more time. The second paper strongly indicates that US tax policies have lost their foundations since 1986, assuming Mills' notion of equal sacrifice should be followed.

    I don't view all this has hopelessly bad although I do wish more economists would write as does Young, with some sense of indicating they know some mathematics.

  2. Why do we think the answer to climate change has to be solved with a 'new economic theory'? And, if indeed a new economic theory is needed to combat climate change, then what's the proper place for this new economic theory in the solution?

    For climate theories, their place is pretty clear: as models to project the future behaviour of the climate under different fuel use regimes, and thereby to guide the making of policy. They're used for description, though ultimately they can be used to guide prescription.

    Current "economic theories" unfortunately seem to be mix up description with prescription -- their models of how things with are too tangled up with ideas of how policy "should" work to be useful.

    Perhaps a good economic theory won't be "capitalist", or "socialist", or "grey", or "green", but will simply be a theory (or one of several theories) that best predicts human behaviour under differing economic regimes.

    -- frank

  3. It seems to me that the Krugman/DeLong/Stiglitz school of economics has a much deeper and more sophisticated understanding of economics than their dominant "Chicago school" competition, but that their prescriptions, which the Obama administration (confusingly not of the "Chicago school") are promoting, are desperately wrong. That is, we cannot stimulate our way out of this situation.

    Unemployment is not a problem in itself. Inadequate access to resources in a labor glut is the problem.

    A system based on labor shortages is unhealthy without a labor shortage. This is what brings the left on board to a "growth" obsession.

    But we have hit something of a brick wall. The Chinese, and at least implicitly the rest of Asia and Africa and so on, are transitioning to middle class just as we were already flirting with limits to growth. Any growth will dramatically drive up commodity prices, and squelch the growth. Meanwhile the Chinese sit on a huge pile of cash that we cannot renounce without destroying ourselves.

    The idea of taking on debt to get out of a recession depends on the idea of growth. In general, you only borrow what you expect to be able to pay back. In the absence of growth, nobody will be able to pay back anything.

    But it's all nonsense. Money, debt, capital, these are all artifacts, formulations that we have created to support our marketplace. So the question is, how big is the smallest adjustment that solves the problem. The problem being that people continue to need a certain decent level of existence, and there are resources aplenty to provide them, but that growth is over and labor demand is permanently reduced.

    It is difficult to believe that there is no solution to the problem. We have not run out of resources for a dignified life, though population increase has to stop soon. We have, however, run out of room for aggregate growth.

    So I think the conservatives, though I can make no sense out of their economic theories at all, are correct in their prescription. The solution to our situation is not debt, which is a mere palliative.

    I do think the least disruptive solution begins with taxing the rich, especially in the US, and it's important not to see this as punitive. But what to do after that? We need to rethink our incentive systems so that people can "make a living", i.e., find dignified and secure lives, in a non-growth economy.

    And clearly the whole big finance thing is out of control and needs to be brought down to size. A ramping up transaction tax would appear to me to do the trick there. We can't build a millennium-scale society on a two-minute arbitrage economy.

    But I'm sure I've missed stuff. Economics as a discipline needs a clean slate.

    But we have to steer the actual real-world economy, not try to reinvent it.

    So Frank's "best predicting human behavior" is really not exactly right in my opinion. For one thing, we need a way to steer human behavior toward more sustainable actions. For another, humans can make collective ethical decisions (e.g., slavery, child labor, emergency care).

    True, we're out of the habit, but it's time that changed.

  4. John Kay (my second-favourite commentator on economics)indulges in a rant against mainstream economics, although he doesn't really touch upon the failing that Michael and others here focus on, the problem of growth and sustainability.

    Some quotes:

    Economists often make unrealistic assumptions but so do physicists, and for good reasons. Physicists will describe motion on frictionless plains or gravity in a world without air resistance. Not because anyone believes that the world is frictionless and airless, but because it is too difficult to study everything at once. A simplifying model eliminates confounding factors and focuses on a particular issue of interest. This is as legitimate a method in economics as in physics.

    Since there are easy responses to these common criticisms of bad predictions and unrealistic assumptions, attacks on the profession are ignored by professional academic economists, who complain that the critics do not understand what economists really do. But if the critics did understand what economists really do, public criticism might be more severe yet.

    ....

    Economics is not a technique in search of problems but a set of problems in need of solution. Such problems are varied and the solutions will inevitably be eclectic. Such pragmatic thinking requires not just deductive logic but an understanding of the processes of belief formation, of anthropology, psychology and organisational behaviour, and meticulous observation of what people, businesses and governments do.

    The belief that models are not just useful tools but are capable of yielding comprehensive and universal descriptions of the world blinded proponents to realities that had been staring them in the face. That blindness made a big contribution to our present crisis, and conditions our confused responses to it. Economists – in government agencies as well as universities – were obsessively playing Grand Theft Auto while the world around them was falling apart.

  5. MT, I think none of that really detracts from the need to decouple description from prescription. The current economic "methodology" seems to be thus:

    [Step 1] think up the type of policy measures I prefer

    [Step 2] think up an economic model which'll show that the policy measures I prefer lead to good results.

    And as a result we have "Marxist" economic modeling, "Hayekian" (?) economic modeling, "Keynesian" economic modeling, und so weiter.

    Yet somehow we don't see this for climate modeling, which is only one big field; we don't have "Marxist" climate modeling, or "Hayekian" climate modeling, or the like. So why are we content with such absurdities in the realm of economic modeling?

    I think John Kay's quote (given by Andy Skuce below) gives an indication of what economic modeling really needs.

    To me, we need one single economic model (or perhaps an ensemble, akin to the IPCC ensembles) that can model economic behaviour under a wide variety of regimes. So a Marxist regime, a Hayekian regime, a potlatch-based gift culture, etc. will be represented as different "scenarios" in this vast economic model, much like the A1FI, B2, etc. scenarios in climate modeling ensembles.

    This will probably be difficult -- requiring, as Kay says, lots of knowledge from anthropology, psychology, and other disparate fields -- but I see no other way to make economic modeling truly useful for descriptive purposes.

    (By the way, MT, you may notice that I just got a new e-mail account.)

    -- frank

  6. Mondragon cooperatives have grown considerably and are quite successful in northeastern Spain. The Swedish government & company style works very well for Swedes, all of them. I don't see how either of those two ways of organizing indicates that 'mainstream' economic thought is somehow dramatically wrong. Instead consider the US tax policies since around 1986 and the three (carefully selected) papers referenced in my earlier post.

  7. David, no particular behavior says much about any theory, unless it is a theory which declares that behavior impossible.

    It is exactly the confusion of "capitalism" as behavior vs "capitalism" as academic theory vs "capitalism" as cultural icon that I am complaining about here. We can't think clearly about words which are overloaded.

    I have not seen anything claiming to be a rigorous economic theory which I find convincing.

    I have not followed up on your suggested readings. If you tell me they treat finite resources and finite waste sinks as first order features of their analysis, I will take an interest. As far as I know, no mainstream economics does so, and that is my complaint with economic theory.

  8. I'm a simple man and I think that what it boils down to is setting limits (or have them set for you). This automatically has implications for economic policy.

    James Howard Kunstler, who is terrible at predicting timing, but has a great writing style, names a few things in his latest Monday column:

    Of course, the first order of business is to get corporate money out of politics. Are we capable of doing that? Can we legislate a redefinition of corporate "personhood?" After all, corporations have no allegiance whatsoever to the public interest, only to their shareholders and boards of directors. Who was the Supreme Court kidding when they proposed in 2010 that corporations have a personal stake in politics. Corporations are sociopaths. They need to be tasered!
    The second order of business is to enforce the existing laws in money matters and bring back laws (e.g. the Glass-Steagall act) that were recklessly thrown away in the systematic bid to loot the working public; then move beyond that to contest the web of rackets that make it impossible for Americans to even take care of themselves.
    The third order of business is to shut down the war industry and close hundreds of overseas military bases that are draining scarce public capital.
    The fourth order of business is to prepare the US public for the realities of the post-Global economy and the post-cheap-energy way of life. Tell them the truth: we don't have "a hundred years" of natural gas. We can't drill-drill-drill our way to "energy independence."

    Personally I would like to see a debate on how much one person can own. How much money? 10 million? 100 million? 100 billion?

    How much land? One acre? A hectare? 10 hectares?

    How much can someone make a year? 1 million? 10 million? 100 million?

    Should the ratio between how much a CEO makes and how much his secretary (and everyone else in the firm) makes be fixed? At what ratio? 1:10? 1:100? 1:1000?

    Throw in the question 'how much money can one person own' in an online debate, and people go apeshit. I feel it too down in my gut, an uneasy feeling. That's how we've been conditioned. That's why we love American Idol (and Dream). Take away the idea that there is no limit to how rich you can become, and you take away people's biggest dream.

    But anyway: limits. All of it has been thought out and said in the seventies. I've just started reading a book from that time called Muddling Towards Frugality.

    Limits. What do we need at the minimum?

  9. Neven:

    As I said, one cannot mix up description (how the world work) with prescription (how the world 'should' work). Human behaviour and the human mind are anything but simple, and it's folly to expect them to be reducible to terms that "a simple man" can understand in a jiffy.

    Decouple economic description from economic prescription. This is the first order of business. Get the description reasonably correct first; then we can decide based on the description whether certain things should be limited and how.

    -- frank

  10. Leaping in on the open thread: Krugman once again pointing to the particular ideological constellation in the US and elsewhere that has absolutely no shame. Whether, as in this case, it's writing a 180 degree wrong story about recent financial history, or whether it's climate science:

    "they’ll just keep spouting these claims, and make up new ones, so you need to understand the fundamental bad faith that is driving the whole debate."

  11. "I believe that the climate community MUST be tolerant of a barrage of challenges, because I can’t tolerate a world in which comparable charges cannot be made about economics as an academic theory."

    Hah. I remember when I was protesting as a part of the so-called "anti-globalization" movement in the 90's, and was in Seattle for those protests. Economists would speak of the overwhelming consensus that existed among academic economists for free trade as they saw it: NAFTA, the WTO, etc. I would point to a group of economic historians who felt differently. But academic economists did not really consider them to be economists. They weren't really publishing in the proper economics journals after all - and they had no models!.

    This consensus held sway until Stiglitz broke ranks and many started to see the internal contradictions in at least some of their policies, particularly structural adjustments from the IMF.

    So I know what you're talking about here. Of course there are serious differences between the science of climate and climate change on the one hand, and the study of economics. But I can see how at least some of the more sentient skeptics might not see as much difference.

    I also remember reading reviews of Stiglitz at the time from holders of that consensus. Once he started saying what we had been saying all along, or at least some if it, many in that consensus started admitting at least some of it. Stiglitz as a Nobel laureate was about as high as they come for criticizing the consensus. I am confident that if Curry or Lindzen had the substance and facts to back them up like Stiglitz did, climatology would respond similarly. In the mean time, they will claim they do but have not convinced others.

  12. Michael Tobis --- The three papers all use standard academic economics to consider just tax policies. For another criticism of current policies, consider "For the Common Good" which in chapter 10 or 11 demolishes Adam Smith and David Ricardo.

    I don't know of an eonomic model which begins by positing fintie resources, only scarce ones. Indeed, so scarce that the supply of the 'good' cannot be increased beyond a limiting rate, but that might be taken as a fintie supply which is then traded between participants in the economy. Sinks, i.e., unusable waste, might be tratable as a negative 'good' although I've never seen such a tratment. Nonetheless actual decisions are made about how to properly dispose of 'wastes' so I would assume some academic economists consider that.

    Of course all the above is fairly traditional and it seems that Stiglitz has fairly successfully established that imperfect information leads to a failure to obtain Pareto efficiency. I'm not sure that matters for the purposes of income tax policy, but it certainly provides another nail in the coffin of Adam Smith's "invisible hand".

  13. Neven, it is indeed a nice piece. It is not the purpose of P3 to replicate very nice piece.

    It's much more important for us to have original content, and to the extent we don't, to feature stuff of relative obscurity. The usual web advice "do what you do best and link to the rest" applies.

    You are a member, so please submit a piece for the "Beyond Planet Three" section, of 100 words or less plus an excerpt, and we can just link to it without trying to get permission.


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