(In general I am not too happy with these polemical pieces, though I plan to cannibalize them and use them to write something more satisfying.)
What’s up with these things I write about economics?
I’m not an economist. I’m a consumer (or sufferer) of economics, and not a producer. Economics has tremendous prestige and is influential in many vitally important areas (notably public policy, legal theory, and public opinion), so I watch economics from the outside and try to figure out what’s going on. My studies could be described as a natural history of economics (studying economics as it functions in its environment), or as “science studies”, or best of all, as “public philosophy”.
(Note: This piece is introductory to everything else here, more or less, and I’ll leave it on top until I come up with something better.)
So here’s my explanation of the present Collapse of Western Civilization: amphetamines. The world of finance is a rather small one, populated entirely by supersmart, extremely aggressive and competitive men (mostly) who have to go at top speed twelve or more hours a day, day after day. How do they do it? Performance-enhancing drugs, that’s how: legally-prescribed amphetamines. (Cocaine is uncool, and so Eighties.) [I was probably wrong about this].
And since finance controls the world, when the tweakers crash, the whole world crashes with them. Like a football team collapsing in the fourth quarter, the world has run out of beans. We’ve had our jag, and now we’re crashing. Not much fun.
In my small experience, amphetamines are very nice. The world becomes a happy place. You get smarter and have lots of energy, and you can keep on going indefinitely. Complex ideas seem simple and all of your ideas look good. The crash isn’t even that bad if you use in moderation. But amphetamines are not conducive to moderation.
Since the mid-’ 90s, the country’s center-right government has pushed free-market reforms–privatizing banks, ditching price controls and slashing taxes. Companies now pay just 18 percent on profits, down from 50 percent. “The same economic laws apply whether a country is small or large,” says Finance Minister Geir Haarde. “We are experiencing the fruits of a very determined and consistent policy.”
The small and hitherto very prosperous nation of Iceland seems likely to go bankrupt. At the moment they don’t have even enough foreign exchange to import food (which they can’t grow themselves), and because Icelandic banks have defaulted on British depositors, Britain has rather ludicrously declared Iceland to be a terrorist nation. The future is uncertain, but it seems sure that every Icelander will see a big decline in their standard of living, and that includes many who never really profited from the recent boom.
From 2011, first stated in 2005. I am still the sole owner on Google of this sentence. That’s as counterintuitive as it gets.
So now an other school of economics lies in the rubble, if anyone cares. Another voodoo economist will show up sooner or later. All they will have to do is prove that you can cut taxes, maintain military spending, and balance the budget all at the same time.
What’s happening now is politics, and what we really need is a political movement of the radical or populist type, not an additional and supposedly better economic theory. But the Democrats have spent the last 75 years or so expelling everyone capable of leading such a movement, and they have degraded the Democratic brand so badly that they haven’t even been able to keep the Koch brothers — two of the ten richest men in America – from proclaiming themselves to be the leaders of a populist revolt.
Life is sweet these days for economics nihilists.
Behind the “confidence” preached by Melville’s con men lie broader and deeper notions: trust in Providence, optimistic magical thinking, the rejection and condemnation of nay-saying, doubt, and critical thinking, the rejection of negative evidence, the faith that all apparent evil ultimately turns works for good, and the belief that those who suffer are either being justly punished or else being tested by God. These were all commonplaces of American religion and culture of that era, both popular and elite, and both the con men and their victims express versions of the common belief of the time.
6. Likewise, economics is a powerful science until it isn’t — i.e., until the bubble pops. Bubbles are psychological in origin (and thus of no concern to economists), so it’s up to the psychologists to explain them. They can’t do it, though, because they’re losers and only slightly less worthless than sociologists. Economists are the only real social scientists, but they have to rely on those other guys who always fuck everything up. (Like lawyers, though, economists still do have some useful knowledge, and if you can afford one, at times he or she can get the job done for you.)
I now think of economists the same way I think of lawyers. They’re highly skilled advocates who have, in the best cases, a high degree of mastery of their material. But they work in the interests of their own political principles and those of their employers and grantors.
A troubling possibility is that the centrist economists who claim to be liberals think that anyone to the left of them is either insane or a Communist. During the Clinton triangulation administration Krugman and DeLong spoke pretty viciously about the non-centrist Democrats, and you sometimes wonder whether the old liberals (15-20% of the US electorate) have been disappeared from American life. The appropriation of the “liberal” label by centrists would just be the final ratification of the defeat of old liberalism.
The questions Hodgson talks about are of very general importance. Theory and universals seems privileged over history and particulars everywhere (even among the decadent dissidents in literary kink studies.) Up until 1950 or so everyone was thinking about historicity, contingency, and particularity: Dewey, Whitehead, Hayek, Popper, Reichenbach, and later on Donald Campbell, J. H. Hexter, and Stephen Jay Gould. But with the rise of analytic philosophy and neo-classical economics, this theme seems to have disappeared, and the difference between historical and theoretical sciences seems to have been almost forgotten.
Economics was not developed for the purpose of analyzing the economic effects of long-term environmental trends, or for the purpose of dealing with questions of intergenerational equity, and I would say that it still needs lots of work before it will be able to handle those questions. At the same time, probably some economist somewhere has already said most of the things I’ve said, so I expect to be accused of reinventing the wheel in this piece (to the extent that I’m not accused of being a Luddite ignoramus). Economists’ recent efforts to find ways of dealing with the long-term environment should be commended, but in many respects these efforts go against the spirit of their science, and everything they say should be examined very critically. For the moment, it remains important to learn not to think like an economist.
I recently engaged in a long and messy debate at Crooked Timber and Unfogged during which I was repeatedly accused of misunderstanding contemporary economics and overstating its conservative bias. I’m still figuring out what I think about all this, but here are a few speculations about why my opinions are so divergent from those of several others.
Redman notes that, by contrast to physics, the body of generally agreed-upon economics is not large — and not only that, economists from different schools do not even read one another’s work, so that there can be little dialogue or debate between economists who hold opposing views, and still less the kind of confrontation between opposing theories that might lead to a unified view.
One problem with the use of the economic individual as a stand-in for the generic or universal individual is that the economic individual is not a mean but an extreme. The economic individual is not in the middle of a bell-curve, halfway between people who are not rational enough and people who are in some way too rational, and the stipulated economic individual is not even an attempt at a representation of characteristic human behavior. The normative definition of “rationality” never quite disappears, and the economic individual always remains not only an extreme, but surreptitiously (at least to some extent) an ideal
Cowen believes that he is defending the economist’s idea of economic rationality, but his defense will only be persuasive for someone who is already committed to economics and wants to preserve it. However, he may be correct in thinking that that’s the only audience he needs to bother with. Economics is institutionally invulnerable, and everyone in the biz has a stake in the profession’s continued dominance. To an outsider it seems that Cowen is running around patching leaks, but insiders are unlikely to be upset by ad hoc epicycles and kludges.
My opinion is that Sen has finally returned us to a reasonable position on rationality, distribution, and social choice which could easily have been attained fifty or sixty years ago (and probably was), and that the long detour through formalization has been harmful. Without speculating about Arrow’s and Robbins’ personal motives, it seems clear that their work became central to economics to the degree that the profession of economics, especially after 1970, did not want to talk about distribution, but did want to make the best possible case against state intervention in the economy.
Nowadays single Van Gogh works sell for fifty million dollars or more, and by simple processes of multiplication we can conclude that his entire body of work is worth several billion dollars.Thus, Van Gogh’s average annual value-added during his short career must have been several hundred million dollars. So you have to ask yourself — where was this money during Van Gogh’s lifetime? Where did this value come from, since it simply didn’t exist in Van Gogh’s time, when the paintings were actually being painted? Considering that he and Theo never saw any of it, from an economist’s point of view weren’t they just a couple of suckers?
To me the real story is that there’s never been any evidence at all that economics’ assumption of individual economic rationality is valid, and a lot of evidence that it isn’t. The rationalizations found in Friedman’s Positive Economics have allowed economists to rely thoughtlessly on these unproven assumptions for about five decades, and if a few little experiments are required to convince them to drop this inaccurate and unproven default, that’s cool with me. But it’s a little like someone cherry-picking Bible verses to make their point to the Vatican.
Based on my reading, at least five of the six points are highly questionable. The whole issue of “What is really a science?” is terribly confused by now, and strong claims like Lazear’s can only be thought of as ideological. The empiricism and testability of much of neoclassical marginalism is very doubtful. The hypothesis of “rational individuals” never was at all well-grounded, and it’s now under heavy attack. Equilibrium has turned out to be a false, conservative standard (in the physicist’s sense of “conservative) which causes economists to ignore and misunderstand historicity (see Mirowski, 1989, and Mirowski, 2004, pp. 229-271). Finally, economics’ incursions into new territory have often been ridiculous and disastrous.
The internal criticisms of economics fall roughly into two categories: bad mathematics (notably the laws of general equilibrium), and empirical falsehood. Besides general equilibrium, the economic concepts which Keen says are erroneous include “the representative agent”, the downward-sloping demand curve, the upward-sloping supply curve, diminishing marginal productivity, the use of risk (as in gambling) as a proxy for uncertainty (what Rumsfeld calls the “unknown unknowns”), Say’s Law and its various revisions (which only work in a static economy with no accumulators of wealth, no growth, and no capitalists), and the neoclassical adaptations of Keynes’ work.
The supposed child-commodity marks a major problem with Becker’s theory. Imagine someone raising goats, which are in fact commodities. You put money and time into your goats, and with luck you can sell them for a profit. Or you can kill or eat them. Or if they become a nuisance, you can give them away or have them put to sleep. Commodities don’t really cause a big nuisance. Children, on the other hand, are strictly money down the drain. You can never sell them, and you can’t eat them or get rid of them. They impose major legal obligations, because you are both responsible for their care and for their behavior — yet once they become adults, they no longer have any obligation to you.
When the child-commodity turns eighteen, it becomes independent. At that point the little child-commodity (which had been producing “psychic income”: p. 194) turns into human capital — i.e., an independent adult selling its labor on the market. At this point the parental unit has nothing to show for his efforts. The child-commodity upon which he had lavished so much money and time is gone forever, to be replaced by an independent, competing human unit.
|Of course, most societies forbid the purchase and sale of children, but it is easy to forbid what would be uncommon” (page 29).|
The economics profession’s proud and almost total ignorance of history and geography has rarely been better displayed than here. Even in today’s world, children are bought and sold (and not only for child prostitution). In much of the pre-modern world, for example China, children of poor families were often adopted by richer families to supplement their labor force, with a cash payment usually given to the poorer family.