The trouble with economics
"Involuntary unemployment should be confined to cases of specialized skilled workers . . . Such unemployment is far below the levels usually characterized as the "noninflation-accelerating rate of unemployment," sometimes referred to as the "natural" rate of unemployment, in one of the most vicious euphemisms ever coined."
-- William Vickrey
The intellectual chauvinism of the profession's academic elite has consequences for the real economy, for the living standards and life chances of billions of souls the world over. It's not that the accepted wisdom has produced error. That is true in every discipline. It is that the errors all run in the same direction -- favoring the interests of those with power. Perhaps that is to be expected as well, but it doesn't mean we should blind ourselves to the reality.
Nor is it my contention that the assortment of reigning theories and methods are intrinsically at fault.
"Micro" theory in my view is interesting, enlightening, and highly adaptable (albeit not often adapted) to a variety of perspectives. Macro theories are plentiful and diverse. It is also true that the canon shows some adaptability. As far as math goes, there are intricately mathematical heterodox models.
In other words, there's nothing wrong with pasta, just because it's Tony Soprano's favorite food. It's what goes on late at night in the back room of Satriale's Butcher Shop.
Alien notions are absorbed but coopted in the process. Energies focus on unearthing counter-evidence to unwelcome empirical findings. Otherwise qualified people with a tendency to make waves are filtered out of the leading departments. The personal testimony on this is overwhelming, and nobody has offered any rebuttal. It's the politics.
The politics narrows the field of enquiry, the answers that are arrived at, and the people who get to provide the answers. Now of course economists are entitled to any politics they like. And they are free to pretend they are above politics, just like politicians do. And I'm here to tell you theirs is not a discipline founded on objectivity.
What is the result? From a policy standpoint, all the elaborate research funnels into the following precepts:
- Measurable, private-sector GDP is preferable to public goods, leisure, non-market amenities, and not incidentally consideration of policies that promote the sustainability of the economy and ultimately human survival. (You know, the little things.)
- Private capital formation is preferable to consumption.
- Zero inflation is preferable to high employment.
- Inequality in terms of income, gender, and race are (pick one) inevitable, a sign of sound policy, morally praiseworthy, not interesting, not really happening, impossible to remedy.
Consider the Vickrey quote at the top. Professor Vickrey was thoroughly 'neo-classical', as mathed-up as anybody else for his time, acclaimed all around for his work. Nobel prize winner, president of the American Economic Association. He asserted that a basic theory in macroeconomics going to a fundamental public issue was not merely wrong, but "vicious."
Who do you think he was talking about?
(Here's some more from Vickrey.)
But what if NAIRU was a "holy lie"?
May 31, 2007 10:53 AM | Reply | Permalink
Thanks for Vickrey. I think I understood most of that (scary thought). A fifth level alliterative title, too. Yummy.
aMike
May 31, 2007 11:16 AM | Reply | Permalink
And it is important to note that this is not primarily due to the premises of the theories, but rather due to the premises about how to theorize. Mathematics-uber-alles implies that what is known and easy to quantify has greater weight than what is known and difficult to quantify, even if in theory it is acknowledged that what is known and difficult to quantify is part of what we are really aiming at ... that is, human material welfare ... and that what is known and easy to quantify ... that is, GDP ... is merely a speedometer reading unaccompanied by any indication of what the current ideal speed happens to be.
May 31, 2007 11:22 AM | Reply | Permalink
A mechanical engineer, a physicist specializing in thermodynamics, and a mathematician were stranded on the proverbial desert isle, with its one tree. A case of canned beans was under the tree. If they could open it, they would not starve.
They had no can opener.
Speaking first, the mechanical engineer climbed the tree, and attempted to break open the cans by throwing them against rocks. The cans merely bent.
After much calculation, the thermodynamicist put the cans in the hottest sun, and dug a hole into which cool seawater trickled. His idea was that a sudden chilling of a hot can would pop it open. This didn't work.
The mathematician smiled, raised a finger, and said "first, assume a can opener."
--
Howard
*equal opportunity offense to both extremes*
"Those who cannot remember the past are condemned to repeat it" [George Santayana]
May 31, 2007 12:32 PM | Reply | Permalink
And of course a speedometer doesn't give any indication of whether or not you're headed to Gran-mama's ... or towards a cliff.
May 31, 2007 12:41 PM | Reply | Permalink
When I heard that, it was not a mathematician but an economist ... but if you define a an orthodox economic theoretist as a narrowly trained type of mathematician, its really the same joke.
May 31, 2007 1:15 PM | Reply | Permalink
Early in my career, I provided computer support to a group of economists. My general conclusion was that if you put all the economists in the world in a straight line, they would still face in different directions.
--
Howard
*equal opportunity offense to both extremes*
"Those who cannot remember the past are condemned to repeat it" [George Santayana]
May 31, 2007 1:26 PM | Reply | Permalink
Now that is one that I have heard in two different forms. The first is, if you laid all the economists in the country on the ground, head to toe, they still wouldn't reach a conclusion, and the other is if you want to restrict a group of economists to two contradictory conclusions, make it a group of one.
May 31, 2007 1:29 PM | Reply | Permalink
Precisely.
When people complain about the failings of GDP as a measure of welfare, that's my response. It was never designed as a measure of welfare, it was always a measure of final sales of newly produced goods and service. They could be goods, they could be bads, they could be kind of ok's but not worth the resources consumed ...
... that requires judgement. GDP does not judge, it only counts.
May 31, 2007 1:38 PM | Reply | Permalink
IMHO the most important way Vickrey diverged from the mainstream was his views on taxation.
Section VIII, "Summary," from "The City as a Firm," by William Vickrey, in _The Economics of Public Services_ (1977), ed. by Martin S. Feldstein and Robert P. Inman, pp. 334--343:
While it is dangerous to extrapolate too freely from admittedly oversimplified and even caricatured models (such as the above) to the complexities of the real world, it seems not too rash to draw the conclusion that urban land rents are, fundamentally, a reflection of the economies of scale of the activities that are carried on within the city, and that efficient organisation of a city, or even of the urban life of a nation as a whole, requires that these land rents, or their equivalent, be devoted primarily to the financing of the intramarginal residues that represent the difference between revenues derived from prices set at marginal cost and the total cost of the activities characterised by increasing returns. This means that revenues derived from these rents must defray not only those overhead costs of government and public services that are not marginally attributable to specific outputs, but also the intramarginal elements of most public utility costs, as well as those of a considerable range of activities ordinarily thought of as belonging to the private sector. Such a subsidy is especially crucial for mass transit and for other forms of transportation where economies of scale are significant, given the special relationship existing between transportation and land values.
Use of land rents, or, at least, of a major fraction of them, for public purposes is therefore not merely an ethical imperative, derived from categorisation of these rents as an unearned income derived from private appropriation of publicly created values, but is, even more importantly, a fundamental requirement for economic efficiency. Cities that take the lead in such public use of land rents may find that in the long run the subsidy is self-financing through the enhancement in land values that results, while cities that lag may find that in the long run they are unable to compete in national or world markets with the cities that manage to organise themselves more efficiently through the use of land rents to cover intramarginal residues. There will, of course, be many an agonising slip between abstract economic analysis and cold political and economic reality. Lack of comprehension, political intervention, strategic recalcitrance, and the inertia associated with heavy commitments of fixed capital in what the French so aptly term immeubles may slow the processes involved to a glacial pace. But the fundamental tendencies and requirements inherent in the very nature of the city can be ignored only at great peril to its economic health.
May 31, 2007 5:14 PM | Reply | Permalink