Leech the economy

Anatole Kaletsky’s evisceration of “old economics” in the London Times may be consistent with the general backlash during the current recession, but it’s half-baked.

Today’s academic approach prevented economists from thinking about a world that is, by its very nature, unpredictable and inconsistent… others may revive the literary and anecdotal traditions of the great economists of the past… Smith and Hayek produced no real mathematical models. Their eloquent writing lacked the “analytical rigour” demanded by modern economics. And none of them ever produced an econometric forecast.

To wish simultaneously for a return to an “anecdotal tradition” and for theories to be “tested against reality” is perverse. The economy is indeed a complex system, and to draw correct conclusions on the relationships in a complex system requires more than anecdote. As epidemiology is to medicine, so econometrics is to economics; a
patient’s recovery after leeching does not prove leeching effective, and folk inference in economics would be just as counterproductive, in its own way. The “analytical rigour” so disdained by Mr. Kaletsky represents the struggle to understand and draw inference from the very real complexity that to rely on anecdote risks ignoring.

The first idea, known as “rational expectations”, maintained that capitalist economies with competitive labour markets do not need stabilising by governments.

The second idea — “efficient markets” — asserted that competitive finance always allocates resources in the most efficient way, reflecting all the best available information and forecasts about the future.

The specific “theories” attacked by Mr. Kaletsky are also grossly misrepresented. Hell, the concept of a theory is being misrepresented. An economic theory is an if-then statement, and this is not a matter of mathematics, which is after all just a language like any other. No theory, no matter how it is expressed, can ever do more than suggest the outcome that would pertain under a given set of conditions. No theory, then, can “[maintain] that capitalist economies… do not need stabilizing by governments”, or “[assert] that competitive finance always allocates resources in the most efficient way”. To attack the assumptions underlying these theories is good and rigorous; to either attack the value of their existence is to distort the purpose of academic inquiry. It is precisely because
theories are if-then that any single conclusion can be given an ‘if’ and be co-opted and championed by the politically powerful of the moment, but the “assertions” come always from the interpreter, not from the theorem.

Literary and cross-disciplinary approaches to economics can have great value in conveying economic ideas and in complementing other forms of research. What would be unacceptable, however, would be the abandonment of valuable tools to help us to understand the way things are. Perhaps attacking economists makes us feel better, but this is like blaming the shipbuilder, engineer or mathematician for a drunk captain’s crash.

And finally, because that felt a bit too serious, I must mention these:

Today’s academic economics reverses this process: if models disagree with reality, it is reality that economists want to change.

Policymakers who turned to academic economists for guidance in last year’s crisis were told in effect: “The situation you are dealing with is impossible: our theories prove that it simply cannot exist.”

This is garbage.

Economist versus economist

This mostly innocuous entry at the Freakonomics blog is comparing the rejection of offers in the ultimatum game (where I propose a division of some money, you either accept or reject, we get the money if you accept but don’t if you reject, and then we go home) to the rejection of the ‘bailout’ of the financial sector. It raised my ire with this:

Many economists cannot understand why they’d do such a thing. To an economist, an offer of even 1 percent would be worth accepting since it is free money, and because for the second player it is ultimately irrelevant how much money the first player takes home.

But most people do not think like economists. When offered 10 percent or 20 percent or even 30 percent of the total, they are disgusted by the inequity — and willing to pay the price for that disgust by rejecting the offer.

Show me a scrap of evidence that “many economists cannot understand why they’d do such a thing.” Pardon my language, but that’s bullshit. Really, what the hell. In fact, it’s so infuriatingly ridiculous that I’m going to be forced to actually say something as clearly and calmly as I can, but I’m going to have to do it in boldface:
Economists are capable of feeling things.

Phew. No, seriously, the quotation claims that:
  1. Economists don’t understand that people care about things.
  2. Economists don’t feel feelings.
  3. Economists do not conduct life in the same way as people who actually care about things.
Give me a break. 

"Economics Basics"

Looking for something quite different (as usual), and found this page, from something called Investopedia, which is entitled “Economics Basics”. It makes me think, more than anything else, of the Telephone game (or Chinese Whispers if you’re British), because it’s one degree removed from everything – one degree removed from correct, one degree removed from stereotypically bad, one degree removed from sensible.

Economics may appear to be the study of complicated tables and charts, statistics and numbers, but, more specifically, it is the study of what constitutes rational human behavior in the endeavor to fulfill needs and wants.

Immediately the lean towards ‘professional’ or investment-bank type economists is obvious: academic economics is emphatically not the study of complicated tables or charts or numbers. Statistics, maybe. But that’s fine, a good way to start, to address the misconception about economics and math-y stuff.

Wait, though: the “study of what constitutes rational human behavior”? That makes zero sense. I don’t really understand what that would mean, let alone how it relates to economics. I don’t know what ‘rational human behavior’ is; no-one does. No economist should say to a person ‘here’s what you should be doing’ (with the exception of policy advising normative economists, for obvious reasons), and indeed they don’t.

As an individual, for example, you face the problem of having only limited resources with which to fulfill your wants and needs, as a result, you must make certain choices with your money. You’ll probably spend part of your money on rent, electricity and food. Then you might use the rest to go to the movies and/or buy a new pair of jeans. Economists are interested in the choices you make, and inquire into why, for instance, you might choose to spend your money on a new DVD player instead of replacing your old TV. They would want to know whether you would still buy a carton of cigarettes if prices increased by $2 per pack.

Snooze. And then we default right back to the ‘economics is money’ thing. Goodness me, but the problem of scarcity informs questions so much more vital than ‘how does this guy spend his money on electronics’. Sure, we’re interested in consumer behavior, but come on, this is Economics Basics! Give me some life. The fruit of the earth, the budget of a government, the precious time of a modern human being, all of these are scarce resources. All of these are used to fulfill wants and needs, and are subject to choices.

To study these things, economics makes the assumption that human beings will aim to fulfill their self-interests. It also assumes that individuals are rational in their efforts to fulfill their unlimited wants and needs. Economics, therefore, is a social science, which examines people behaving according to their self-interests. The definition set out at the turn of the twentieth century by Alfred Marshall, author of “The Principles Of Economics” (1890), reflects the complexity underlying economics: “Thus it is on one side the study of wealth; and on the other, and more important side, a part of the study of man.”

I love that Marshall quotation. It sums up very well the state of the economics art at the time, the discipline spawned by interest in wealth and how it accumulates, perpetuates, moves around. I hate the repeated ‘self-interests’. Delete ‘self-‘ and you’d have a (semantically identical) but more neutral, and more accurate, statement. And again – broken record time – this is misleading on the rationality assumption. We don’t make it because we know what rationality is, because we don’t, or because we believe people are rational, because that’s unknowable, or because we’re grumpy bastards who shout ‘humbug’ at the rich tapestry of life. We make it because we want to try to answer questions that involve the actions of people and groups of people, and we can’t start that unless we breathe life into those actors.

If I ask you how the process of exchange of stuff between people works, do you a) dismiss the question, because people are weird and unpredictable, b) tell a parable about a guy who makes wine and a guy who makes cheese who get together and have wine and cheese, or c) model some people who like some goods and show that they might prefer to trade some of their goods with each other?

Well, b) and c) are the same. They are only the difference between an idea and its mathematical expression. If you say a), you can’t be an inquisitive human being, let alone an economist. Fine, I don’t care about a lot of stuff, especially in economics, but these are questions we can try to answer, and the denunciation of any model of human behavior, implicit in criticisms of this straw-man ‘rationality assumption’ is philistinism and willful ignorance.

I don’t suggest that Investopedia is willfully subverting the course of human intellectual endeavor, though. I just accuse them of being a bit narrow-minded in their Introduction to Economics Basics. I know that “Economics Basics” can’t be complicated or anything, but is this what a whirlwind tour of economics has to look like? But wait: our Introductory Economics courses are exactly the same. Pot, kettle.

Why don’t we understand economics education?

Increasingly preoccupying my thoughts recently is the remarkable fact that the economics profession doesn’t really know anything about how undergraduate courses are received by the students who take them.

Unquestionably, the most common type of research into undergraduate education is the type like this, this, or this (sorry to link to protected academic articles): teaching methods. The semi-famous series by William Becker and Michael Watts derides “chalk and talk” in favor of more creative methods of lecturing. In “Teaching Economics at the Start of the 21st Century: Still Chalk-and-Talk”, those authors conclude:

“In contrast to the passive learning environment that characterizes the teaching of economics, class discussion and other forms of active learning, rather than extensive lecturing, are now the dominant forms of instruction in other fields of higher education.”

I agree in principle that it’s no fun to try to learn – really learn – any subject by sitting in a lecture, but goodness me, “active learning”? How about “devote some time to reading a variety of books and material on the subject you’re learning”? How about “sit down with colleagues or experts and talk and listen”? In my life, those have been the most effective ways of getting information and understanding into my head. Am I alone? To me, that’s active learning, and it doesn’t require fancy technology or a three ring circus, just a good library and good educators with time to devote to small groups of students. Lectures, especially to large classes, must naturally be presented without a lot of nuance.

The cult of the classroom experiment, or demonstration, or performance art, or audience participation, is not, however, the real issue. By far the bigger problem is that we have no idea – repeat, no idea – what students want, expect or get from economics courses. Why do they enroll? Why don’t they enroll? Why do they drop out? Why do they major in economics? What do they think economics is about, before, during, after they take economics course? What if they never do? Who do we lose?

Why don’t we have the first idea about the answers to those questions? Have we ever asked? The mind boggles. We’re try to patch up the wreckage of the lecture system, when all the while we might be sailing to entirely the wrong place in our leaky boat. Forget the method for a moment – what are we even actually teaching?

In a separate article to the one I quoted up above, William Becker’s “Teaching Economics in the 21st Century” says:

“Media headlines scream the need to understand macroeconomics. At a minimum, courses in macroeconomics should enable students to have a greater understanding of the economic news as it appears in the Economist, Business Week, and the Wall Street Journal than those without an education in economics.”

I’ve covered this ground before. How about, at a minimum, we teach economics properly? How about, at a minimum, we kick civics into a course where it belongs and actually show students what economics can be, and what it is? Compromising the integrity of an entire field of hundreds of years of intellectual thought with political, philosophical and moral implications so that people can understand the Wall Street Journal? Who wants to understand the Wall Street Journal?! From the same article:

“Departments of economics have two powerful reasons to care about improving the quality of their teaching. First, the contest for resources within institutions of higher education implies that the number of majors and enrollments matter…. Whether students will take more courses in economics or choose to major in the field because of improved teaching is hard to say, but, at least, improved teaching is unlikely to hurt enrollments!”

Hilarious, I’m sure. I’m kidding: it’s sickening. Can we entertain the notion that perhaps higher enrollments are not compatible with improved teaching? We are supposed to be running an institute of excellence in learning and thought. Whoring for enrollment is disgusting.

Economic literacy, or how we squashed dissent

My heart smiles on veterinarians today:

“Popular misconceptions

Economics is commonly viewed as being focussed on money. This notion has been reinforced in veterinary medicine…”

A quotation, apparently, from “Veterinary Epidemiology” by Michael Thrusfield, that I stumbled upon while prowling for some evidence on what we’re doing to economics students.

A large chunk of the evidence on that subject comes from formal economics articles ridiculing the population’s incompetence. This one actually asks students some questions testing so-called “economic literacy” (who sets monetary policy in America, what are profits for, what happens to export if the dollar increases in value (yawn)) and this one has some suggestions on how to promote it.

I’ll put aside my skepticism that knowing, for example, the difference between fiscal and monetary policy is important to a person. The questions that aren’t purely civic literacy are boring and/or irrelevant; more dangerously, the promotion of “economic literacy” in an introductory economics course represents another challenge to the correct perception of what economics actually is. If we make civics the goal of introductory economics courses, we lose any semblance of teaching “principles”, and slide further into pretending that economics will offer the technocratic “answer” to your every question.

As if to reinforce this fear of mine, the questionnaire article finishes up by trying to convince me that

“…economic knowledge has a direct and substantive effect on opinions about economic issues”

That’s seems reasonable, until the example:

“An opinion question asked: If the supply of oil was reduced by a crisis in the Middle East, do you think the United States government should prohibit oil companies from raising oil and gasoline prices?

Over four in ten college seniors were opposed to allowing the oil companies to raise prices, hardly a strong endorsement of competitive markets…. what college seniors know about economics directly affects their acceptance of a market result.”

Where do I begin? What breathtaking arrogance it must take to assume one has the unimpeachable answer to an “opinion question”. What a sad revelation of the true failure of economics teaching it is to equate “economic literacy” with “a strong endorsement of competitive markets”. Worse than sad, it’s infuriating. When this passes – in the supposedly prestigious American Economic Review, no less – I am entirely unsurprised that students who take economics courses answer “opinion” questions differently than other students. Our economics courses are dogmatic and pass opinion and ideology as scientific fact.

This isn’t political: I hold my own beliefs, as anyone is entitled to. Perhaps “economic literacy” would help people decide what they believe. That’s the difference between “I’m not sure would happen if we tried to move to socialized health care” and “I think I have a reasonable idea of what might happen if we tried to move to socialized health care”. I’d be thrilled if we could help someone answer that question.

What my profession seems to be pushing is instead the difference between “I don’t believe that the market mechanism is always best” and “I believe that the market mechanism is always best”. Is it possible that “economic literacy” could change my mind? Of course it’s possible; that doesn’t mean that it will, or that it should. There’s a very fine line between wishing for economic literacy and wishing that people believed what you believe, and crossing it is unacceptable.

Of course it would be great if we all knew a bit more about how the institutions that control our resources operate. Keep it out of my “principles of economics”. If you care so deeply, make everyone take a course called “how economic policy works in the United States”. Don’t pollute my discipline with your sleight of hand. If suppression of debate, and sacrificing the chance to teach economics without ideology attached are the price of “economic literacy”, it’s a price far too high.

Now that I’ve gone off the deep end, I should point out the classic survey of public versus economists, the “Survey of Americans and Economists on the Economy” which is actually pretty interesting. The (comparatively) reasonable “Straight Talk About Economic Literacy” (pdf) by Bran Caplan is a nice (but long) article that talks about the survey and asks why the responses diverge.

Is it too late to enroll in veterinary school?