It’s called "the ivory tower"

Here’s a thoughtful antidote to “boo economists!” by Barry Eichengreen at The National Interest. Perhaps the most forceful point is this:

What got us into this mess, in other words, were not the limits of scholarly imagination. It was not the failure or inability of economists to model conflicts of interest, incentives to take excessive risk and information problems that can give rise to bubbles, panics and crises. It was not that economists failed to recognize the role of social and psychological factors in decision making or that they lacked the tools needed to draw out the implications. In fact, these observations and others had been imaginatively elaborated by contributors to the literatures on agency theory, information economics and behavioral finance. Rather, the problem was a partial and blinkered reading of that literature. The consumers of economic theory, not surprisingly, tended to pick and choose those elements of that rich literature that best supported their self-serving actions. Equally reprehensibly, the producers of that theory, benefiting in ways both pecuniary and psychic, showed disturbingly little tendency to object. It is in this light that we must understand how it was that the vast majority of the economics profession remained so blissfully silent and indeed unaware of the risk of financial disaster.

Eichengreen notes that business schools, for example, are part of the production line of financial labor and ideas and so have no inventive to rock the boat; however, he also directs a lot of fire at academic economists for being part of the stitch-up. I accept that the author surely knows better than me the “pecuniary and psychic” benefits to academics from the use of their work, but a counter-hypothesis would be ignorance rather than malice, a sin of omission, not commission. How many in economics departments know what’s going on in industry – or even business schools? Is it enough to claim a quorum of the profession?
There’s probably analog to the hard sciences here. Newspaper science (cf. Bad Science, for example) is to natural science research as financial industry models are to economics research, or something like that. Imagine a house full of economists (reality show idea?) – every so often one wanders out to hand some obscure technical document to someone from the outside world, and something inevitably gets lost in translation. 

More navel-gazing

Since there are now, I estimate, more articles on the economics profession’s predictions/responses to the recession than there are atoms in the known universe, replying to them all would presumably take a very long time. One example will probably suffice. 

In the Financial Times yesterday, John Kay talks about “How economics lost sight of real world”. 
The past two years have not enhanced the reputation of economists. Mostly they failed to point out fundamental weaknesses of financial markets and did not foresee the crisis, and now they disagree on appropriate policies and on the likely future course of events.

As I have (almost) argued before, this is – for better or for worse – not in the job description of the vast majority of academic economists. It is precisely like attacking a physics professor because there was a blackout last night. More importantly:
Economists, like physicists, have been searching for a theory of everything. If there were to be such an economic theory, there is really only one candidate, based on extreme rationality and market efficiency…. a few deranged practitioners of the project believe that their theory really does account for all human behaviour, and that concepts such as goodness, beauty and truth are sloppy sociological constructs.

I have addressed the “economists don’t feel feelings” argument before. And, by the way, I guess you can color me deranged. Economics is a theory of everything! 
First: the assumption of “rationality” that is central to economic theory is a modeling assumption and makes no restriction on behavior whatsoever. The auxiliary assumptions of what people care about – the things that they “rationally” try to achieve with their limited resources – are restrictive. Second: “market efficiency” is neither a theory or a modeling assumption. It is either a metric (one of many) by which we can evaluate outcomes (i.e. is this “efficient”?) or a result of an economic theory, which, like all economic theories, will probably require many assumptions. 
I would agree with the proposition that it is wrong to assume that markets are “efficient” (and what does that even mean?). Economists do not make such an assumption. I would agree with the proposition that it is wrong to assume that people care only about their own material wellbeing. Economists do not make such an assumption.
Academic economists did not predict this recession because that is not what academic economists are “supposed” to do with their time. 

Ignore the past, and it shall teach thee?

So why don’t we teach much economic history anymore? An article in the Chronicle by Russell Jacoby asks this question, with similar for the history of psychology and philosophy, by wondering why Marx doesn’t feature on your typical economics syllabus.

The analogy is probably to the natural sciences. Once we scientificize (is that a word?) economics, it becomes more reasonable to follow the path of the naturals – after all, the history of chemistry, for example, might be interesting, but it doesn’t necessarily help you be a better chemist. Economists try to answer very specific, answerable questions: methodology becomes crucial, and while the foundation of methodology is important, it’s not it. Here’s what Jacoby says on the topic:

The flight from history marks economics and philosophy as well. Economics looks more and more like mathematics, in which the past vanishes. Sometimes it even looks like biopsychology. A recent issue of the American Economic Review includes numerous papers under the rubrics of “Neuroscientific Foundations of Economic Decision-Making” and “Cognitive Neuroscientific Foundations of Economic Behavior.” But can we really figure out today’s economic problems without considering whence they came?

Of course, my prejudice is the history of thought for its own sake is worthwhile. I want to know how economics evolved; how the foundations of the subject and a couple hundred years of thought brought us to where we are today. However: it’s useful like that more to people like me with a predisposition to wonder about the philosophy of the subject than it is to those who are more interested in learning the tools to form and evaluate policy, for example. If I want to advise on school vouchers, to pluck one example, it doesn’t necessarily help me to know the history of economic thought; I need to know the evidence on school vouchers. Obviously.

The ‘economics as toolbox for analysis’ – positivist, scientific economics – maybe doesn’t need the past. Research building on research, like we do as academic economists, doesn’t need the foundation of the history of thought. Seeing the evolution of the subject, and the little battles over the big issues of days gone by, might, however, make studying the subject as an undergraduate more interesting. Perhaps we could have both: the toolbox-y courses and the intellectual history, for-their-own-sake courses. Why do we need to justify the history only as something that contributes to the toolbox, especially when that might not even be true?

Maybe that’s why courses in economic history or the history of economic thought are not as widely offered as you might expect. Maybe they’d be nice or interesting, but very few academic economists are historians or scholars of thought; we’re scientists now. What faculty wants to teach a course so wildly unrelated to their other work, their research?

Literature or science?

Here‘s an interesting post from Marginal Revolution, titled “Why are the social sciences backward?”, and concerning (bear with me) an article about a book by Gordon Tullock from 1966. What’s for us there?

First, the question is startling in itself given the scientific method in economics. Are the social sciences backward? Here’s how Bruce Cadwell characterizes Tullock’s position:

Tullock next turns to what he considers to be the real reasons behind the backwardness of the social sciences, which in his view is due to differences in the social organization of natural versus social science. The first difference is the relative absence of applied research: because there is no way to patent applied research in the social sciences (He asks, for example, how does one patent a new sales technique?), little of it is done.

This is clearly very different to the modern use of “applied” as it concerns economics, rather referring to concrete, practical methods that arise from the study of people. If that’s the barometer, then I suppose you’d have to consider modern economics at least a bit backward, since not a great deal of it is concerned with this kind of thing, the closest approximation being the “policy implications” section tacked on to every economics research paper (a frankly baffling phenomenon).

Then again, is a “policy implication” really the equivalent of a “new sales technique”? What Tullock seems to be describing is really one degree more practical than economics ever gets. Again, though, this argument applied to the social sciences seems a bit like the difference between, for example, theoretical physics and engineering (to rely on my layperson’s knowledge of both): could we really argue that the natural sciences are generating these practical advances at a greater rate than the social sciences?

[Cadwell:] Furthermore, the second motive for research, curiosity, is in the social sciences “likely to get distracted to essentially non-scientific ends.” This is because in the social sciences:

[The following is directly from Tullock:]. . . there is a strong possibility of artistic distraction. Literature of all kinds is quite frequently based on careful observation of human beings. A large number of brilliant men led by their curiosity to study their fellow men have produced great literature instead of science.

That’s a particularly interesting one, and gives me pause for thought because I perceive a fundamental and disappointing lack of curiosity in the study of economics. I think Tullock’s point here is badly dated by now, at least for this social science: the economics profession, I am confident in saying, will not tolerate “literature” over science at all, at least not in its peer-reviewed academic journals (book-writing occupies an orbit all its own). A little more light is shed by the Marginal Revolution commentary:

Tullock is responding to Mises and Hayek, who both thought that the social sciences were different because matters of human affairs are more complex and because of the subjective dimension of human choice and expectation.

In that case, Tullock could be considered one of the trailblazers of the positivist revolution that replaced big thought with neutral science. In a sense, the struggle of economics has always been to respond to that complexity and subjectivity by simplifying, abstracting, separating to the lowest common denominator of truth in the system. The ‘backwardness’ Tullock identified is certainly less evident, methodologically and in output, than it was at the time he was writing.

Visiting the real world

Economists don’t spend a great deal of time in the real world. We’re especially bad at having arguments, which is strange, considering that we have an infinitely flexible method and a bunch of unanswerable normative questions.

Unfortunately we’re all adrift on the ocean of economic science. The work that researchers do generates the kind of tedious methodological debates that help seminar audiences catch up on their sleep, but it doesn’t generate actual ideological debate: perhaps that’s the biggest possible endorsement of positivism in economics, but we didn’t need to lose it.

I always liked the Oxford Review of Economic Policy; it’s one of the few examples of a true economic policy journal, which means that while it’s still a bit dry, it’s non-technical and, more to the point, actually talks about real stuff. For example, this issue from last year is a survey of what’s going on with pensions – not exactly riveting, but if you’re into that kind of thing, an invaluable look at how economic science can inform ideological debate on pension reform. This one does much the same for growth and development in India.

The saddest misconception about positivism in economics is that we must sweep out all normative debate in order to be “scientific”. Yes, we have to avoid ideological prejudice when we research what’s actually going on, but doesn’t it seem like we’re building a fancy machine and never turning it on? Our “scientific” results don’t change the fact that our economic models don’t provide any “answers” to the great normative questions of what we should be doing.

It all must be especially boring for the poor undergraduates who are the cannon fodder of scientific economics. They get the distilled versions of some of our scientific methods and modeling – without, mind, necessarily finding out about their flexibility – but don’t get any practice in using economic analysis to engage in real policy debate. Perhaps it’s another casualty of the loss of the essay in economics; perhaps that comes from our huge enrollments, victims of our own success.

Just because positive economic modeling is supposed to separate itself from ideology, it doesn’t mean that economists should. Perhaps if we argued a bit more, we’d bring some life back to our discipline.

Economics is not about money

“The most common misunderstanding about economics is that it is only about money and commerce.”

The beginning seems like a good place to start, and the beginning of the misperception of economics is surely the popular notion that it’s all about money. Where did that arise?

The quotation is from “What Economics Is Not” by Llewellyn Rockwell. Unfortunately, the essay also says:

“This is a confusion sown by economists themselves, who postulate something called “economic man” who possesses a psychological propensity to always behave in ways that maximize wealth.”

Economics is social science, so we have to include an idea of how people behave. One way we do this is to suppose people have some likes and dislikes that their choices seek to satisfy. We suppose our “economic man” will behave in ways that maximize satisfaction.

That seems better than having “economic man” behave randomly: who could argue that we don’t, in fact, try to make the best of what we have? Our problem is that it’s very difficult to decide what people like or dislike. We know that many things affect the way we feel – a new car, sunshine, helping a stranger, being smiled at – and, of course, no two people are exactly alike.

To make matters worse, how would we even know if our “economic man” is striving to maximize satisfaction if we don’t really know what makes him tick? What a huge philosophical question it is, and what an obstacle for economics to have to work with something so elusive as human satisfaction!

How can we recover? Economists often tried to make life much simpler by assuming that people only cared about wealth. Most people probably care about wealth to some degree, and wealth is, mercifully, more measurable than satisfaction, so this assumption shouldn’t be way off the mark. Sadly, once we use the wealth proxy for satisfaction, our “economic man” looks like Rockwell’s, and the misperception deepens.

Why was it deemed necessary to make the wealth-maximizer assumption? That is a question for another day. So, too, is how “economics” came to mean money, wealth or finance in its popular usage. Economics is to the stock market as physics is to your electricity bill – it’s not unrelated, but it’s a big stretch…