The received wisdom of ‘market capitalism’?

I don’t know what to think of “Economics Does Not Lie” by Guy Sorman in the I-just-learned-it-existed City Journal. It’s reasonable and well-argued, even as it seems to push the buttons of the anti-economics set, and even as it seems to commit many of the same sins as those pesky “principles of economics“. The agenda seems to be a vigorous defense of the capitalist economy – almost too vigorous, with plenty of pro-America, anti-‘western Europe’ digs. Weird? Hold that thought.

In the meaty bit of the article, Sorman begins:

If economics is finally a science, what, exactly, does it teach? With the help of Columbia University economist Pierre-André Chiappori, I have synthesized its findings into ten propositions… The more the public understands and embraces these propositions, the more prosperous the world will become.

OK, so I’m interested; seems like what we have might be an alternative list of what Mankiw calls “principles” (I despair of ever actually getting a proper use of the word in this context). Sorman discusses them at length, but here’s the list:

1. The market economy is the most efficient of all economic systems.
2. Free trade helps economic development.
3. Good institutions help development.
4. The best measure of a good economy is its growth.
5. Creative destruction is the engine of economic growth.
6. Monetary stability, too, is necessary for growth; inflation is always harmful.
7. Unemployment among unskilled workers is largely determined by how much labor costs.
8. While the welfare state is necessary in some form, it isn’t always effective.
9. The creation of complex financial markets has brought about economic progress.
10. Competition is usually desirable.

First of all, I don’t disagree with the assertion that “almost all top economists—those who are recognized as such by their peers and who publish in the leading scientific journals—would endorse” this list, although that’s obviously verging on the tautology of the clique. As a list of the received wisdom, it’s not bad at all, then.

Nevertheless, though this is a relatively less noxious list than Mankiw’s ‘principles’, it can maybe be taken as received wisdom, but certainly not as axioms (not, to be clear, that Sorman makes any such claim). Where it fails, it fails because it suffers from the same diseases. What, for example, am I to make of the first one? Exactly what is the ‘market economy’ most efficient at achieving? Correct me if I’m wrong, but you can’t just be ‘efficient’ in and of itself, right?

Aside from these familiar complaints of mine, there are a couple of other things worth mentioning, most especially this claim:

Now only one economic system exists: market capitalism.

Not only untrue, but completely untrue. Just as no country has ever tried to implement a wholly communist allocation of resources, no country has ever tried to implement a wholly capitalist allocation of resources. The accurate statement would be that the “markets with government” hybrid system is the dominant one in the modern world – as I’ve talked about before. As Jeffrey Tucker at the Mises blog points out in his response to Sorman’s article, Sorman himself isn’t even talking about “market capitalism”, but about the hybrid system, which is further testament to its ubiquity.

Remember that thought we were holding? Here’s the very last line of the article:

His article was translated from the French by Ralph C. Hancock.

Might the agenda simply be a reflection of the precariousness of the ideology of markets in France? Not such an outlandish proposition…

The arrogance of economics?

A while ago I mentioned the mysterious science of “welfare analysis”. It tries to evaluate outcomes or predictions of economic analysis or modeling; the idea is to figure out whether x is “better” than y.

That’s not an easy task; we have to figure out how we’re going to measure things if we’re going to compare them. Unfortunately, the only way to answer the question is to take a position on the motivations of the people who’d be affected by your policy. It’s sometimes said that the noxious euphemism “thinking like an economist” means “taking all consequences into account”; leave aside for a moment the obvious point that that’s not “thinking like an economist”, it’s “thinking properly”, but rather let’s figure out what “thinking like an economist” actually requires.

It often seems to require answering that question of “better”, to require taking a position on how you’re going to evaluate policies. It’s more fundamental than assuming something about a utility function, or whatever it takes to perform welfare analysis, but rather seems to require an acceptance of those nefarious so-called “principles” of economics, an agreement with what constitutes a “better” outcome for society.

Then we’re led into a world in which very few people who self-identify as “economists” profess support for any policy or means or resource allocation that lies outside the capitalism-with-some-government model that is the status quo. Is that because once a person has studied economics, it’s obvious to them that this is “best”? Is it because it’s impossible to succeed in the study of economics if you don’t agree that it’s “best”, because you’re turned off or ridiculed?

Economists run the risk of being seen as arrogant if we pretend to understand what a “better” outcome is. In the small this manifests as our faith in the cipher of “welfare analysis”; in the large it manifests as the homogeneity of belief and thought among economists.

‘Good’ versus ‘bad’ economics

A peculiar distinction is often made between ‘good’ and ‘bad’ economics when analyzing economic policy. The current hot potato of a gas tax holiday in the US is a case in point – though it might be a trivial issue in the scheme of things, it did provide this absolutely outstanding moment from Hillary Clinton:

“Well I’ll tell you what, I’m not going to put my lot in with economists,” Clinton said, a response in line with some of the populist notes she’s been hitting in recent stump speeches on the gas tax.

There are a couple of things going on here. First, it just shows that declaring opposition to economists is just as popular a political strategy as declaring opposition to ‘business’ or ‘the elite’ or ‘greedy oil companies’. This is almost certainly because ‘economics’ is perceived as being one and the same with these things, an ax wielded by the establishment to crush little people under the wheels of capitalism. Again, true economic analysis is valueless, and is subjective only once we evaluate the outcomes or the processes that would lead to or from one thing or another.

The other point, related, is the implicit invocation of a consensus among ‘economists’. It’s related because it is unambiguously true that the majority of economists evaluate things in a particular way – the subjective part is a collective subjectivity rather than a diversity of opinion. Why is that? Are economists molded into a particular normative stance that evaluates policies or outcomes in a particular way? A significant amount of work has been done on the question of which way the causality runs between studying economics and policy opinions: do economists dislike the gas tax holiday because they’ve studied economics or because people who dislike these kind of policies study economics?

The truth is that it’s very easy to identify what ‘good’ and ‘bad’ economics are, because that label can be attached only to the logical, scientific chain of argument – the positive side – that draws the map from cause to effect. Of course we can argue about the validity of the links in the chain, test our assumptions, look to evidence, but the fact remains that ‘bad’ economics is that which fails to acknowledge the true effects of an action.

By contrast, the normative side cannot be labeled ‘good’ or ‘bad’, because it is only opinion. To argue against a normative stance is to argue against an opinion. This is why it is so dangerous for the ‘Principles of Economics’ to include value-loaded statements; this is why it is so dangerous to have a normative consensus among people who call themselves ‘economists’. When that happens, we risk confusing the normative opinions of these people with a scientific conclusion; it is not.

If a politician was to ignore or lie about the tangible consequences of a policy, that is bad, in the sense of being misleading or untrue. However, if a politician acknowledges the best guess of the consequences, whether they argue for or against the policy is neither bad nor good. Economists would do well to remember that they are part of the second group, not the first. It is fine to point out misinformation, but to argue that ‘economics tells us what to do here’ is to assume that their opinion is good, which is a great sin of arrogance.

When one responds to the gas tax stuff with a line like (from Paul Krugman)

Why doesn’t cutting the gas tax this summer make sense? It’s Econ 101 tax incidence theory…

I’m sure they are really pointing out the tangible consequences of the policy, but the line between the positive and the normative is fuzzed, the value-free analysis becomes loaded with subjectivity. The two must be separated.

"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.

Simple arguments complicated by needless econ-jargon

I’m all for novel arguments, but this one is a classic case of over-complication. The argument belongs to Charles Karelis, and reaches me via this article, called ‘The Sting of Poverty’ (bees feature as an extended metaphor), in the Boston Globe. The topic is relative poverty (in America, implicitly) and why poor people don’t take actions to drag their sorry selves out of poverty. Hold that thought, especially if you see an obvious answer, and let’s go through the Karelis argument, as characterized by the article.

“Compared with the middle class or the wealthy, the poor are disproportionately likely to drop out of school, to have children while in their teens, to abuse drugs, to commit crimes, to not save when extra money comes their way, to not work.

To an economist, this is irrational behavior. It might make sense for a wealthy person to quit his job, or to eschew education or develop a costly drug habit. But a poor person, having little money, would seem to have the strongest incentive to subscribe to the Puritan work ethic, since each dollar earned would be worth more to him than to someone higher on the income scale.”

I don’t think so. For whom is it more costly to do all those naughty, naughty things? For the person with a beautiful job, beautiful house, beautiful spouse or the person with a low wage and low prospects? News: when your labor is worth less money, you have less incentive to work, not the ‘strongest’ incentive to ‘subscribe to the Puritan work ethic.

And while we’re on the subject, ‘to an economist, this is irrational behavior’ is literally offensive to this economist. First of all, please don’t ever use the phrase ‘irrational behavior’. Second, even to the most traditional, boring economist in the room, the motivation for the behavior being described is not difficult to speculate on. I just did, and I didn’t even think that hard.

Continuing:

“It also means, Karelis argues, that at one level economists and poverty experts will have to reconsider scarcity, one of the most basic ideas in economics.

“It’s Econ 101 that’s to blame,” Karelis says. “It’s created this tired, phony debate about what causes poverty.” “

No-one is more depressed about Econ 101 than me, but, yikes, economics is all about scarcity! If there was no scarcity, we can all go home and think about something different instead. I’m always disappointed when someone bashes Econ 101 for the wrong reasons, or bashes some jargon from Econ 101 then uses it anyway.

“The economist’s term for the idea Karelis takes issue with is the law of diminishing marginal utility. In brief, it means the more we have of something, the less any additional unit of that thing means to us. In many cases, Karelis says, diminishing marginal utility certainly does apply: Our seventh ice cream cone will no doubt be less pleasurable than our first. But the logic flips when we are dealing with privation rather than plenty.

If, for example, our car has several dents on it, and then we get one more, we’re far less likely to get that one fixed than if the car was pristine before. If we have a sink full of dishes, the prospect of washing a few of them is much more daunting than if there are only a few in the sink to begin with. Karelis’s name for goods that reduce or salve these sort of burdens is “relievers.””

A couple problems. This is a costs issue again, and the ‘good’ we’re talking about is something like ‘a car with no dents in it’, which you either have or you don’t. Diminishing marginal utility of a non-dent is something too esoteric even for an economist, methinks, and that is not a statement I ever thought I’d write. I’m also struggling very hard not to be facetious about the fact that ‘money’ turns out to be the ‘reliever’. Yes, money is a pretty decent ‘reliever’ of financial hardship!

But then, at last, Karelis actually comes over to the light side:

“Karelis argues that being poor is defined by having to deal with a multitude of problems: One doesn’t have enough money to pay rent or car insurance or credit card bills or day care or sometimes even food. Even if one works hard enough to pay off half of those costs, some fairly imposing ones still remain, which creates a large disincentive to bestir oneself to work at all.

“The core of the problem has not been self-discipline or a lack of opportunity,” Karelis says. “My argument is that the cause of poverty has been poverty.” “

Ah. So it is a cost thing. And there’s one of those simple answers I was holding in my mind from the start: many things conspire to make it difficult for poor people to become rich, not least the fact that the problems pile up. Actually, we call those poverty traps (thanks, Wikipedia!).

What lessons can I take from this exercise? First: don’t mess around talking about people’s motivations and incentives, their ‘utility’ and preferences, when it is not necessary to do so. Maybe it sounds nice and jargon-y, but let’s have a bit of Occam’s Razor and just check if, in fact, it’s just a cost thing. Second: a bee sting or car dent metaphor does not a new economic theory make, especially if your new theory calls for a reconsideration of scarcity(!).

The actual policy prescription Karelis is pushing is to simply give the poor money instead of bending over backwards with possibly more costly benefits-in-kind. The debate there is so involved and long-running that I’m not even going to try to describe it in one sentence, but suffice to say it exists, and of course anyone is welcome to join it. I just wish Karelis didn’t invoke ‘economics’ to make his particular arguments, which are much simpler than they are made out to be, and require no dressing.

Principles of Economics

Here at Brown University, our Econ 101 course is actually numbered EC0110 and is called “Principles of Economics”. Like a lot of introductory undergraduate-level economics courses, it uses Greg Mankiw’s book of the same name. What is a principle of economics? Here’s the list that Mankiw suggests in the book:

1. People Face Tradeoffs
2. The Cost of Something is What You Give Up to Get It

3. Rational People Think at the Margin
4. People Respond to Incentives

5. Trade Can Make Everyone Better Off

6. Markets Are Usually a Good Way to Organize Economic Activity

7. Governments Can Sometimes Improve Market Outcomes

8. A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services

9. Prices Rise When the Government Prints Too Much Money

10. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment

Are these principles? I cannot square any of 5 through 10 with any definition of “principle”; those are, at best, positive economic results (not to be too facetious, but by 10 I think many students must be asleep). A principle, to me, is something that you hold as a fundamental truth, before, during and after you do anything. I see the logic in writing a list that looks like this: it summarizes a lot of the “received wisdom” in our discipline.

That, however, is exactly the problem. How can I teach an anti-capitalist student economics if my first lesson says “Markets Are Usually a Good Way to Organize Economic Activity”? “Good” is a normative judgment; the statement is loaded with value and intent. It’s a huge result built on so many layers of qualifications that I couldn’t possibly say it with a straight face. It’s not possible to sell economics as scientific and flexible if we recite dogma in lesson one. Economics is not capitalism. Maybe that should be a principle.

I should probably make some kind of attempt to define “principles” as I see them.

1. Economics tries to describe and predict things about the world around us.
2. Economics is divided into value-free positive method (what will happen, or how do I achieve a particular goal) and normative opinion (what ought to be done). It can inform debate through the former, but cannot settle it, because there are no right or wrong opinions.
3. Economists assume people act as if they try to get their preferred outcome of the ones that are available, but they don’t restrict what people’s preferences are.
4. Positive economics uses simplified models or empirical observation to describe or predict what will happen, and must never make value judgments. We can try to interpret the validity of positive results by testing them against real-world data or by figuring out what would happen if we made different simplifying assumptions.

I’m just thinking (typing?) out loud, and certainly a more thoughtful attempt would be justified. My “list” is certainly less snappy, that’s for sure. In general, though, I really believe that “principles” should describe the foundations of economics, not its received wisdom. The foundations of economics can accommodate everyone, not just those who would find themselves nodding agreement at a statement like “A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services”. With no exaggeration, I can say this is like opening Music 101 with a list of principles that includes “Only Rock Music Is Good Music” or something equally ridiculous. It is heartbreaking.

Rather delightfully, this list of “Principles of Feminist Economics” – again, I must confess, I don’t often see how “[blank] economics” is distinct from “economics”, especially since the [blank] is usually a value judgment – is, despite dripping with normative statement, actually more palatable to me than Mankiw’s list. At a bare minimum, looking at them side by side reveals how neither of them can possibly be considered “principles of economics”. I’m sure mine can’t either, but you get the point: I think a minimum requirement for a list of principles is that they be basic and as agreeable as possible to the people who care.

I applaud the goals of this page entitled “Great Ideas For Teaching Economics”, even if a few of them are really more “how to get people interested”. Allow me to quote at length this contribution from Hugh Himan:

“For a number of years I have devoted 6-9 class meetings in the Principles of Economics course to class debates on current economic issues.

Objectives:

1) to acquaint students with the reality that economists as well as people in general do not think alike on economic issues;

2) to have students realize that disagreements on issues reflect both different positive economic views (cause and effect) as well as normative difference (values)

3) to challenge their own thinking about economic issues

4) to have each student experience through a debate on the beliefs and values of the three major paradigms of Conservative, Liberal and Radical.

The debates are evaluated by the students and instructor on the basis of specific criteria with final scores tabulated on a 100 point scale. The evaluations are based upon how well the team presented their assigned position, not whether the evaluator agrees or disagrees with that particular paradigm.

It has been my experience that the students truly get involved with these debates, well beyond the proportion of the final grade their scores represent. Most enjoy the role playing, some even dressing as they think a Conservative, Liberal or Radical would appear.

Beyond the enjoyment many experience, I like to think that they have gained deep insight into issues i.e., that problems can be viewed differently based upon one’s belief as to “truth” causes and effects as well as on the basis of values (no good vs. bad but in terms of relative priorities). For so many students I have taught over the years who tend to think there are single, simple answers to such problems as poverty, unemployment, national defense, acid rain, exposure to the complexity of such issues is important to their education.”

This is, indeed, a great idea. Is there a better way of understanding the very concept of normative judgment than to force students to debate from all sides? I think it might be fun to ask students to shout out anything they can think of, and to write down an “economic model” that proves it. This really invites students to think of 1) how flexible positive economics is, 2) the importance of assumptions, 3) how to judge an economic theory, and 4) the role of normative opinion.

We need all three levels of understanding in economics: positive, value-free, empty economic science; interpreting whether the positive results are correct, either empirically or by exploring the implications of alternative assumptions; normative, value-laden opinion. Exercises that can explore these distinctions are the most valuable in our teaching arsenal. A list of “principles” pregnant with loaded statements is not the right way to present our discipline.