In a way this is a rather trivial post, about language and attitudes as much as anything, that follows from some of the reaction to this post and related debates. One big difference between most (not all) mainstream economists compared to their heterodox or other social science colleagues is insularity. Political scientists will talk to sociologists who in turn talk to international relations people as a matter of routine. Economists by and large talk to each other. This is not because their subject matter is narrow - economists are notorious for applying their tools way beyond economics.
Most of the time I think that is fine, but sometimes it is not. How do we deal with the times that are not? I want you - as either an economist or social scientist or interested spectator - to think about a visit to your doctor. Why? Because economists should really think of themselves like doctors. (I know some want to think of themselves as physicists, but what can we do.) They are trying to understand highly complex and erratic systems based on a small number of principles, where most of the time they have very little idea of what is going on. But they have data, and some of the time they can make a lot of difference to people’s lives.
Now supposing your doctor prescribes you a course of treatment. It involves drugs that you have read a little about, and you have some concerns. If you were a social scientist would you say to your GP something like the following:
“I’m a little worried about this. I feel that you may not have adequately addressed the ontological and epistemological issues that are raised here. What exactly is ‘treatment’, and when is it necessary? Have you thought about the complex social and economic interrelationships that lay behind your prescription? Is the nature of what you call ‘illness’ really independent of the nexus of interactions that could be loosely called the medical profession?”
I kind of hope you wouldn’t, because I do not think you would get very far if you did. You might be much better off asking something like the following.
“I’m a little worried about this. Have you thought about whether this treatment is appropriate to my particular circumstances (HT Ben Goldacre), or are you reacting to pressure from the drug company or someone else? Has that company published all its trial data, or only the trials that were successful, and how was success defined in this case. Is this really going to make me better, or just increase someone’s profits?”
It is a simple and obvious (I did say trivial) point - you will get much further if you talk specifics in a language your doctor will understand, rather than in generalities and terminology they will not. Economists want (or need) to know why their approach is missing key issues or linkages which compromise their analysis, just as the doctor needs to know why they might be recommending the wrong treatment. You would not insist that your doctor needed to have studied economics before they can be a good doctor.
But if you were an economist, would you think it legitimate for your GP to respond like this.
“How inappropriate of you to ask me these questions. I’m a doctor, and I know from my years of knowledge and experience what is the right treatment for you. As you cannot know what I know, then you should not get involved in these issues. Some of the things you mention are really none of my business, and I do not see why I should worry about them.”
Now as an economist you know that such a response from your doctor would be both arrogant and naive. The doctor should ask about the quality and objectivity of the information they receive, and know full well that drug companies exist to make money. But might your response to a social scientist be as arrogant and naive?
Let me take a real world economic problem: the response to the financial crisis. Some have suggested that banks have become too large and need to be broken up, or that the activities of high street banking need to be separated from the activities of the casino. Your economic analysis tells you that networks of many small entities can be as subject to crises as networks involving a few large banks. You are also able to devise a system of Chinese walls that mean that the activities of the casino can be separated from those of the high street even within the same company, and your political masters seem to prefer this approach. You recognise that different assets differ in their liquidity, and so you devise complex weighting algorithms for computing capital ratios. Your suggestions form the basis of negotiations between officials and bankers, and a set of rules and regulations are agreed.
Over the next few years you watch in dismay as your complex system begins to unravel. The CEOs of the large banks seem to constantly have the ear of politicians, who in turn gradually compromise your elaborate controls to render them less and less effective. Those in charge of administering the rules find it much more lucrative to work for the banks, and so regulators gradually lose expertise and resolve.
And you realise that right from the start you made the wrong choice. You decided to focus on what you knew, which was how to design systems that worked well as long as those systems remained unchanged, but which were not robust to intervention by self-interested parties. In short, they were too open to rent-seeking. You realise that actually the best thing to have done was to break up the banks so that their political power was forever diminished. And you recall a conversation with your social science colleague when this all started, who might have been trying to tell you this if only you had understood the words he was using.
"actually the best thing to have done was to break up the banks"ReplyDelete
Nah, actually the best thing would have been to let the banks which should have failed, fail.
And what about things like deposits and the whole banking and payment infrastructure?Delete
Simon, I applaud your choice of this topic. In fact, most economists I’ve read have shown an inexcusable amount of hubris, short-sightedness, and stubbornness—all bad traits for scholars—not only after 2008, but as long as I’ve been at the social sciences, since 1990. Note I say “social sciences”—I’m one of those non-economists who spent as much time in grad school outside his home dept (sociology) as in it—I studied with historians, economists, and political scientists as well, and learned quite a bit from them. I would recommend you (you all, economists, and you, Simon) do the same. Especially because the principles of organization in the social sciences are totally screwed up, unlike in the natural sciences, where there is a healthier principle of building upon each other.ReplyDelete
But let me take you to task, beginning with the hypothetical patient’s first question. I think you miss the boat by poking fun (i.e. dismissing with guile, to steal a phrase from Oliver Williamson). In fact, there are major epistemological issues in economics and the social sciences that you all seem to avoid completely. The blind pursuit of positivism is dogma, not backed up by real considerations and weighings of critical and alternative approaches (e.g. hermeneutics). (By the way, maybe patients should ask more complex questions of GPs. A member of my family might be alive if a someone had questioned a particular British GP and shocked his sense of complacency.)
In fact, were you to read outside economics—theory, epistemology, method—then maybe you’d appreciate this clumsy effort here. (Please don’t say you don’t have time. I have a family and a full workload, like you, and I have time.)
Even more troubling is that you want everyone else to speak YOUR language and use YOUR categories. This is a real example of hubris that heretofore you have not demonstrated. You presume that just as the patient should speak in the doctor’s language, the anthropologist should speak in yours, because you presume that only your analytic language—categories of analysis, assumptions of causation, etc.—are the only ones that matter. (Foucault is most famous for this kind of critique, although he is far from alone.)
Now, here’s the puzzle. The doctor’s huffy response (“How inappropriate of you…”) is the same thing you were doing a few paragraphs earlier. Instead of saying it is inappropriate to ask questions, you implied that it is inappropriate to ask a set of questions using particular categories or initial axioms.
I think part of the problem is that too many economists don’t talk to others outside their field, and have no idea what kind of knowledge is generated elsewhere. (Noah Smith commits this sin regularly and seems to revel in it—he is ignorance in action. Thank you, Simon , for being the opposite.) Those outside economics read some of that field and take it seriously, although I’ll admit my colleagues in soc/anthro/history don’t read or think enough about econ. I’ve read work by Oliver Williamson, Gary Becker, J. M. Keynes, Adam Smith, Douglass North, John Nash, Stanley Fisher, Mancur Olsen, Milton Friedman, Jeffrey Sachs, Paul Krugman (not the blog), ad nauseum…Have you and your colleagues seriously grappled with, say, Max Weber, Georg Simmel, or Pierre Bourdieu?
Economists should not think of themselves as doctors. This is intellectual arrogance and one reason why economists really screw up, especially outside narrow topics. (As an economist friend said about Becker’s Treatise of the Family: does this guy have a family?) You need to think of yourselves as scholars. Humble before argument and evidence.
Sorry if this is long and sounds harsh—but I’m a little disappointed and expected better, perhaps “more thoughtful.” But let me end by thanking and applauding you for doing this. This is what is needed. A baby step, but hey, that’s how babies learn to walk.
Economists should not think of themselves as doctors. This is intellectual arrogance and one reason why economists really screw up, especially outside narrow topics. (As an economist friend said about Becker’s Treatise of the Family: does this guy have a family?) You need to think of yourselves as scholars. Humble before argument and evidence.Delete
If I recall correctly an economist once said that no economics paper is complete without policy recommendations? I do not know whether that is true or whether it was irony. That would be thinking like a doctor, trying to find an immediate fix for a current problem, which at least public economists often tend to do. I would prefer a large part of any science to be a humble search for understanding.
I'm glad you wrote this, because the views you express are common, and in my view part of the problem. Before getting to that, a minor point. Of course I did not say that there are not major epistemological issues in economics and the social sciences, or even imply that. It would be very strange if I had, given my own interest in economic methodology. As I said, this is about language and attitudes.Delete
I think your problem is here: "Even more troubling is that you want everyone else to speak YOUR language and use YOUR categories." When talking to economists, yes I do, just as you would want to talk to a doctor in a way that he/she would understand.
It is not intellectual arrogance for economists to think of themselves like doctors. I think this is what many social scientists find difficult to accept. Most economists are not scholars - they work in firms or the civil service or central banks, and most of the time do valuable work. If you want to have any influence on what they do, you will have to talk to them in language they understand. It is as pointless to demand otherwise as it is stupid to insist every doctor understands the philosophy of science.
If a precondition of you talking to economists is that they have read Max Weber, Georg Simmel, or Pierre Bourdieu, then you will not have a conversation. You may wish it to be otherwise, but even if you do not accept my argument that it should not be otherwise, that is the way the world is. Ever since I was a student some social scientists have been waiting for economics to collapse as a discipline because it failed to be like the other social sciences, but instead it has only increased its influence. It has also made plenty of big mistakes, but it will continue to do so if you take this attitude. I do not mean to be harsh, and please continue the dialogue if you wish.
Not to get into an argument, but I don't think you get the point. You want to support a status quo balkanization of the social sciences with the "take it or leave it" attitude about language and categories of analysis. (By the way, I'm not waiting for economics to collapse--that seems to be a defensive position on your part.) And where do I say there is a precondition that you all read Weber et al (although you might learn something from them)? My point was that non-economists just might be a little more well-read than you think and have something to contribute--but you refuse to see any of it when you take this defensive position. (In fact, the social sciences need serious reorganization, maybe closer to the way the natural sciences are--but given institutional inertia and investments in status and interests, fat chance of this!)Delete
By the way, whether economics has increased its influence because of value added or because of relations of power is an open question--and as Krugman always complains about Very Important People (?) and the like, might be power is at work here as well. I would not bank on value added purely, even primarily, as the reason for the success (such as it is) of the discipline. This is not to belittle economics and economists, but rather to suggest a little humility.
The invitation is to expand your vocabulary. (The invitation runs the other way, of course, and I always encourage my colleagues to engage economics and economists--hell, I assign economics to my non-economist students, and comparatively, they are more open-minded and critical of economics than vice versa, at least in my experience, which of course need not be universal.) If you'd prefer not to, then please, keep talking with same old same old with other economists. (Note that those who did expand their horizons--Sen, Olsen, North--have made some pretty interesting contributions and given us all something to think about.)
(And yes, I have talked to doctors in this way, in the UK as well as the USA, although not quite with the exact words you use. I find that they stop for a moment to think, and then usually respond thoughtfully--albeit in a limited way, because we have little time and the patient is usually my child and not myself. Discussions with doctors in pubs is a different thing, and that gets interesting. In fact, the people most closed-minded to such discussions are business school students and some professors--but again, I raise the caveat that this is just my experience, although some other colleagues have similar observations.) Calling this "stupid" potentially reveals something about you that I had hoped was not the case, although it might be a slip of the tongue and not intended.)
Oh dear, that was not what I had in mind by dialogue. You are making out that I do not think non-economists are well read or have anything to contribute!! What I am saying is the way to get what we both want, which is for economists to expand their vocabulary, is to show them where their current analysis is missing out, or going wrong, in specific terms using a language they will understand. Like the example I gave at the end. And I said that expecting every doctor to understand the philosophy of science was stupid - what does that reveal about me?!Delete
Fine, leaving the "stupid" comment aside...Delete
The well-read/non-well-read point is that economists tend to be in this little intellectual bubble that is reinforced by how journals select what gets published and what does not, as well as grad school syllabi (Krugman and others have written about this). They presume there are 1) a basic set of questions or issues of legitimate analysis (this seems discipline-specific), 2) a basic language or framework that constitutes "analysis," and 3) a basic template for noting needed improvements. You say that economists will only listen to the language of economics (categories and method); everything else is French. Not very scholarly. Put differently, I can show you where you are wrong, but if it has to fit in your framework, you might not get it or accept it. You want the discussion of what constitutes "questions," "data," "analysis," etc. to be on your (economists', not SWL's) terms. But...we are talking about social processes and issues.
Let me give one example. Many years ago, I was speaking before an audience of economics professors and students about the political economy of post-socialist Russia. The professors continuously, and rudely, interrupted time and time again because they wanted tesifiable propositions. I had no intention of providing them, because that was putting the cart before the horse and not what I really wanted to speak about. Finally, I did: the probability of a large firm surviving was a function of relations to the state. They immediately rejected this because it did not involve efficiency. A inefficient firm could not possibly survive--and apparently, they kept this up in the lunch afterwards. Needless to say, they were quite wrong in positing that inefficient firms could not possibly survive beyond the short-term--whatever that might be--in post-socialist Russia. In other words, cognitive dissonance got in the way of any kind of exchange. Now, I knew about efficiency and markets and yada yada yada. I also knew my political economy and economic sociology, and I'd read my Douglass North. I could speak their language--but when I gave them a proposition and data (off-the-cuff as it was), they didn't even listen. It did not register at all.
That's just one example. By the way, it's not only economists who do this; scholars from other disciplines do it too. One interesting insight is a collection of interviews the late Richard Swedberg collected with economists and economic sociologists. Enlightening.
At any rate, dialog needs to be on terms of making sense of the other. Rather than ask, "Where are we wrong?"--which sets a tone of conflict--a better approach might be, "What are the questions we are not asking or the logics of analysis we are not using?" Better we all be the anthropologist who goes out into the field willing to listen and interact, rather than making the "other" prove their legitimacy. (Whether economists want to do this or not is their business, and their gain or loss. Personally, I'm happy where I am; to the extent this stuff bothers me, it's because policies have real effects, and policies based on a limited set of questions and (possibly problematic) theories can inflict real pain. Of course, that policy-makers listen to economists more than, say, anthropologists is a function of other things because supposed success or superiority of economics, but that's best left for another discussion/venue/century.
My experience of social sciences and of economics might be of great help here as I enjoyed a few courses in other disciplines before joinging an economics program. By experience, economic training in the academia is often very theoretical and somewhat less empirical, at least so far as earlier courses are concerned.Delete
It was an habit in sociology, psychology and political science to proceed rapidly to the application of their respective models to reality, with the success of each course depending on our ability as students to provide a convincing and rigorous research paper on some subject relevant to the course in question. In economics, most courses focus applied calculus, applied statistics and modeling. To put it simply, we're doing a lot of applied mathematics and philosophy and very little actual science until advanced courses.
If you ever encountered the mathematical formulations of our economic models and understand enough about mathematics to be able to interpret it, you probably felt the beauty of it. If you want an example, I can give you the models we used in my third macroeconomics course: its main appeal is that, while it sets out to analyze the behavior of firms, workers and consumers under monopolistic competition, it collapses into a perfect competition model as a peculiar parameter tends toward infinity. It is incredibly appealing as the model appears like a more general case.
It's tempting to forget the intention of modelling: we're trying to simplify reality, to organize it and draw relevant relationships to ultimately advise public choices. It's not meant to be complete or perfect -- but it's easy to take that step. Moreover, when you go through a lot of formal arguments and interpretations, it is not as much of a reflex to go back to empirical matters. By habit, arguments can easily remain philosophical. In this respect, I would grant some credit to your impressions: some economists behave more as theologians than scientists. With that said, if you read Freitag (famous canadian sociologist), you also encountered the appeal of wonderful theoretical structutres elsewhere: as you said, it's not limited to economics.
With that being said, the vast majority of economists really correspond to what SWL talks about: they collect data and try to retrieve economically meaningful concepts out of it (most of the time, that means trying to get a production function). They know very well the limits of their analysis, they know when they'll have data to work and when they'll have to introduce hypotheses. And their work consist of getting this information, transforming it and analyzing it to give advices on specific subjects.
You will not love what I will say here, but economics is sometimes the only way to deal with these problems. If you want an example of this, think about countercyclical macroeconomic management or evaluating the impacts of industrial policies on investment. Sociology, however beautiful and wonderful it is, is completely irrelevant here: it does not give you any tool to come up with a simple, effective plan with quantative measures of what to do.
Economics is useless elsewhere. If you want a very bothersome example of that, think about slavery: social sciences and humanities are filled with critical tools that allow you to object to this practice. Of course, your objection will be culturally centered and ethically driven, but it will be informed by a sense of what's going on. Economics will not give you this opportunity. Our models involve three objects -- preferences, constraints and some environment -- and institutionalized norms as embedded in legal codes fit in the third kind which are taken as given. It's embarrassing, but that's inherent to any modelling, I would argue.
Adam Smith. Ricardo and other early economists were essentially keen observers of human nature (social scientists ?). This seems to be missing from economics today.Delete
Edmund Burke in 1763 speaking about the followers of John Wilkes:ReplyDelete
“the crowd always want to draw themselves from abstract principles to personal attachments.”
I think if economists are really going to question whether their framework is the right one to understand the economy, a form of human organisation, they need to talk to sociologists, political scientists, historians, political scientists and others. Otherwise there is no way they can possibly judge whether setting up the economic problem as one of unlimited wants and limited resources and greedy agents is the right one and whether artificially constructed devices such as the representative agent are a proper way to go. You ask where did these things come from and why. What is the justification for the methodology and underlying philosophy of capitalism used in modern mainstream economic theory? The usual response from economists is very revealing "well what else can we use"? That is like saying, "if the world is not flat, what is it?"ReplyDelete
Also economists do not seem to know the history of their own discipline well. When was the one time macro-economic policy actually unambiguously and dramatically succeeded? Well it was the response to the Great Depression. Did this policy prescription rely on a representative agent model? No, clearly not. This does not mean that it cannot be improved, but it does mean that at least that component is not essential and we can improve it other ways and not tie it ontologically dubious micro-foundations.
And what did the author of those policies say. Did he say rely on Model? No, he said this:
"Perhaps the reader feels that this general, philosophical disquisition on the behaviour of
mankind is somewhat remote from the economic theory under discussion. But I think not. Tho this is how we behave in the market place, the theory we devise in the study of how we behave in the market place should not itself submit to market-place idols. I accuse the classical economic theory of being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future (Keynes 1937: 215)."
Other social sciences have been revolutionised by the major debates in philosophy. And these are all about methodology, in particularly ontology and epistemology. The debate between Popper and Habermas is important. But I am not convinced economics will change. Why? Well it is to do with power hierarchies - and that, is well explained in political science. And I would also argue that political science and its big variables like power, has a lot more explanatory power in explaining economic phenomenon than a lot of economic theory itself.
This fits with Pierre Bourdieu's claims about strategies inside fields, such as academic fields. There are three strategies. The first is conservation: the top want to stay on top, so they follow and enforce those rules as best they can. (This might be economists at present.) The second is succession: actors below the elite but who have enough capital that they think they will have their day if they play by the rules. (This might be political scientists.) The third is subversion: passively or actively challenge the rules, passively if you have little capital (passive resistance), actively if you have enough. (This might be people in cultural history.) Partly facetiously, I suggest two more: just enjoying what you have and getting satisfaction from your work (Anthropologists? Historians?), and doing really interesting work and coming up with really interesting ideas while spinning your wheels (sociologists?).Delete
Actually, nothing in economic theory compels you to suppose that there are unlimited desires or needs, nor that agents are greedy. In most cases, utility functions depend only on the consumption of the agent in question and they mostly are monotonically increasing in consumption. However, nothing forbis to include the consumption of other agents into it or to define a point of repletion. With that in mind, consider what happens if someone prefers less than he can get... He just leaves it there. You don't need an economist when this is the case because the question of what to give up is not relevant here.Delete
Economic theory is saying that people do as well as they can, with well and can being defined in a specific way. Nothing here is assumed about what humans can do or not, but realism tends to come at the cost of complexity and we are entitled to ask when realism is worth it. With that said, no model is perfect and criticism is welcome, so long as it is informed.
"Actually, nothing in economic theory compels you to suppose that there are unlimited desires or needs, nor that agents are greedy." is consistent with my understanding of the basic utility maximization framework, although social preferences like spite, altruism, reciprocity, etc. seem only really come into vogue with the rise of behavioral economics (with e.g. dictator games, ultimatum games). Utility maximization does not require material greed, but exclusive material greed has been the prevailing default assumption anyway (not without at least some cause, of course---material greed is undeniably an important motivation, as has been verified in most behavioral game-theoretic / behavioral microeconomic experiments).Delete
Also! Apologies for the double-post, but I forgot to reply to this:Delete
"When was the one time macro-economic policy actually unambiguously and dramatically succeeded? Well it was the response to the Great Depression."
Is this really the consensus view of the policy response to the Great Depression? I was under the impression that the length and severity of the GD are generally blamed in substantial part on the US govt's tepid monetary and fiscal reactions at the time.
Philip: On this last point, I think you need to distinguish between the macroeconomic advice that most macroeconomists gave (and what textbook macro implied), and what policymakers did. The weak recovery is down to 2010 austerity, which in turn is in part a consequence of the politics of the right.Delete
Oh -- I thought he was referring to the 1920's Great Depression, not the more recent Great Recession. Maybe I'm confused all the way around!Delete
If they were, then I agree with you. It was the policy failure of the early 1930s that changed economics!Delete
I'll surprise many people, but nothing in economic theory forces you to conceive of desires or needs as infinite, nor of agents as strictly self-interested. To introduce some jargon here, the criticism involved concerns the form of the utility function: most of the time, it is monotonically increasing with consumption and, again most of the time, it only contains the consumption of the agent in question as an argument. However, I can solve both of these problems at once: introduce the consumption of agents in your arguments and use a function with a maximum so a point of repletion exists. It's still economic theory, if you wonder.Delete
With that being said, consider what happens with these small adjustments, especially the one with the repletion point. Anyone acquainted with optimization knows the answer out of mathematics, but the intuition is simple: if you prefer less than what is available, what do you do? You leave the remainder untouched. In plain mathematics, the budget constraint would no longer be binding, some the maximum is the repletion point. You can generate an entire host of weird behavior with these things, but we're trying to represent a situation where there's not enough to do everything at once -- indeed, what's the point of making a choice if we can get both the proverbial cake and its price back into our pocket? Economists are useless in Heaven. They only matter when doing everything is not an option.
As for altruism, it will only happen with some specficiation of the utility functions that represent the preferences of your agents. It will only changes something if the decision of one agent affects the consumption of someone else. What I have in mind for the non-muggle population of the blog are first order conditions: I don't want certain derivatives to be null so the decision process does change. The resulting behavior is also predictable -- it will be expressed as some weighing of one's consumption versus that of others -- and we're not sure that it will always be relevant.
Criticize economics as much as you want -- economists are likely going to agree and bring up some more. With that being said, the goal of modelling is to make informed decisions and we're trying to highlight key relationships. Realism always come at a cost -- it makes models more complex, not only to compute, but also to use -- and your intention is not to reach theoretical perfection. Your intention is ultimately to be able to give a good advice and, at some point, it's bound to involve data. I am not convinced at all that using more complicated models will systemtically yield better advice, especially considering you're both bound to use the same raw information -- and that was the essence of Krugman's comments at various points in time since over a decade. I am not sure where SWL stands on this ground, but there is little gain made between contemporary neokeynesian models and a crude IS-LM analysis coupled with an AS-AD model. The basic advice is the same and they work in surprisingly similar ways.
With all of this being said, better models, models that more sensibly represent human limitations and reactions, are welcome. It's not a waste of time or ressource to figure out a way to improve our work. However, that requires criticism that is well formulated, not people pointing out the obvious fact that models simplify reality -- it does mean that these models come with limits and, that, you should be asking about and pointing out. For instance, economists who talk about unemployed people as being systematically lazy probably are abusing the limits of their models...
I'm familiar with utility theory, Stephane, but my point wasn't that altruism is inconsistent with utility maximization per se, so much as that in practice other-regarding preferences have not been commonly modeled by economists. The recent literature on "social preferences" that I mentioned above (and is reviewed rather well in, for example, Colin Camerer's text Behavioral Game Theory) is finally bucking that trend, but social preference functions are relatively new devices for mainstream economic theorists, and they still really haven't caught on much outside of the small-scale experiments usually run by behavioral game theorists.Delete
In short: there are lots of things you can do with utility theory that should be - but have not yet - been done, and which would being to address some of the problems for which e.g. economic anthropologists often attempt to take economics to task.
Also: I agree that the bit about 'infinite wants' is inaccurate. It's easy to model a utility function with finite wants, although it's hard to imagine a world where such a model would be relevant. I think this bit of hyperbole harks back to Lionel Robbins in the 1920s, who attempted (and failed, I think) to summarize microeconomic theory in this narrative way.Delete
Great reply Stephane. Thanks for taking the time to make that considered response. I guess a lot of us understand how neo-classical models help clarify and standardise analysis. We just want more balance. It is often what is not in these models that is what is interesting and important. I do not want to throw the baby out with the bathwater. I just want more interaction with the other social sciences and history to understand economic problems and that means that economists might have to think another way. I also would argue that any model should not come at the beginning of the analysis. It should come once the evidence and available knowledge on the subject has been widely and deeply investigated - otherwise it will frame the conclusion. The model should not be the main item of discussion. It is there to clarify, kick tyres and pull aspects of the discussion together. On this, although imperfect, broadly speaking I think Piketty has shown the way to go.Delete
But let me try to be brief and give one example: advice regarding post-socialist transitions. Sachs and colleagues penned two long articles “proving” that sock therapy was the way to go: rapid liberalization, privatization, and monetization (with an initial inflationary spike to clean up ruble/zloty/etc overhang). Short-term pain would give way to restructuring and a healthier economy. Peter Murrell, however, disagreed and championed “gradualism.” His argument was that some inflation would be okay and that the industrial dinosaurs should survive as a safety net for employment, and a combination of entrepreneurship and foreign investment would produce a private sector that would absorb employees of state-owned enterprises. Time was needed, Murrell suggested, because there was a learning curve: this wasn’t just “rational actors” adjusting to new incentives, but also learning what to do in the next institutional environment. (If I recall correctly, he drew on Sidney Nelson & Richard Winter.) So go slow, and don’t worry so much about inflation and privatizing so quickly (but create property rights for the foreign investors and entrepreneurs.)ReplyDelete
Now, this is a simplified form because I only have 4000 characters and other things to do. Evidence suggests Murrell was right. But…now, we have two problems. First, shock therapy would create pain, and this would lead to political outcomes: looser money, backlash (a la Karl Polanyi), etc. That is, you want to get post-socialist Poland or Russia out of the mess? Can’t make politics exogenous. Second, Murrell’s invocation of learning opens the door for more a complicated nature of decision-making—now we need to take into account networks and structures (cf. Gaddy & Ickes 2002), culture and meanings (anthropologists have written on this), what “practices,” etc. Rational expectations and rational choice don’t work here.
Eventually, political scientists, sociologists, and anthropologists went into the field and discovered just how complicated “adjustment” was. It involved politics, it involved culture—it involved more than IS-LM curves, central bank rates, etc. It involves institutions, power, and practices. Where are those in your models? Even if you want to claim that typical macro applies to (institutionally) developed economies as a special case, then the framework (not theory) is incomplete—but maybe those areas of incompleteness need much more scrutiny. And it turns out other social scientists have made headway.
Sock therapy, as imposed by sock puppets. (Couldn’t resist.)Delete
Oh damn (but still might make a good theory)Delete
This point raises a couple of questions. First, is shock therapy the theoretically best solution? If it turns out that it is welfare enhancing to keep those old state companies alive for a while, then economic efficiency and optimal welfare diverge, leading to a rejection of basic economic theory. Secondly, are people right to reject shock therapy, i.e. is it "their fault" if shock therapy doesn't work? If so, then economics might have to include political considerations into its policy recommendations. This will also lead to complications, because rational actors should, in general, accept shock therapy (if it is in fact the most efficient solution). Yet, if they don't do it, there is a rejection of the rational actor principle that sits at the foundation of economics.Delete
Shock therapy was a policy supposedly driven (or at least justified) by economic theory. SWL asked "to show them [economists] where their current analysis is missing out, or going wrong, in specific terms using a language they will understand." So this is a small example. Making politics exogenous and undertheorizing (or dismissing) structure and culture (broadly defined) ultimately made shock therapy look pretty bad.Delete
"the central proposition of welfare economics: that free trade in competitive markets leads to outcomes that cannot be improved upon by government intervention."ReplyDelete
Do you agree with that central proposition? If you do you would almost disagree with probably most historians and social scientists outside economics who would at the very least say that that is open to question.
I have quoted Roger Farmer, but it appears he does not agree with the theory.
Incidentally, Farmer’s animal spirits model is really an application and mathematical dressing-up of Weber’s conception of the social order as a set of mutually consistent expectations. To my knowledge, he hasn't pointed this out.Delete
Interesting. Could you develop this idea a little more? (Might fit the topic, economics vs other social sciences--we have potential overlap here, but talking past each other because of different words but similar ideas)Delete
This isn’t the thread to get into the issue in depth, so I’ll be very concise. Expectations enter into behavioral functions as arguments. Farmer models interaction between these expectations to demonstrate multiple macroeconomic equilibria. Weber, nonmathematically, takes the interaction between expectations of agents to be a core part of his object of study. (But it’s been eons since I read his General Economic History and Theory of Social and Economic Organization, so don’t trust my memory.) Most economists, however, believe that the primary function of a theory is to generate hypotheses; hence multiple equilbria are flaws to be eliminated, if necessary by a priori assumptions on functional form. Sufficient?Delete
What is the primary function of a theory in your view, Peter? I tend to think of it as 'explanation,' but I don't see how we can be satisfied in an explanation if it does not generate testable hypotheses with which we can vet the quality of our explanation. What alternative do you have in mind?Delete
Philip, just my own view, not speaking for Peter, but the problem many social scientists whose work crosses into economics have is not that theories should be verifiable, it is why are the particularly theories that do exist in economics the foundations and starting points that frame the analysis. RBC, New-Keynesianism and even much of the micro-foundations do not seem to rest on a particularly deep philosophical justification of this particular interpretation of the workings of capitalism.Delete
Fair enough, Anon. I'm not sure a philosophical justification would likely sway me; I think empirical (breadth of fit versus simplicity of model) & mathematical (ala the Lucas critique) arguments would sway me more. But I'm certainly not devoted to any particular bit of the current (macro-or-micro-)economic mainstream (though I'm not an economist by training, so maybe that's not unexpected anyway). Serious scientific challenges to the present mainstream should certainly be encouraged.Delete
p.s. Although for me the above is without much content, really; it's sort of a boilerplate 'Yeah! Scientific challenge! Great!' I know quite a bit about microeconomics and game theory, but not so much about graduate-or-higher level macroeconomics, so I tend to just defer to the SWL's of the world, as things stand, when it comes to evaluating RBC or New Keynesianism, mostly.Delete
I have often been on here as a truculent critic, so first of all I have to applaud you for taking on this issue. Part of the complaint from the outside is actually that you are rare in being open-minded enough to believe economists have something to learn from others.ReplyDelete
However, I think I have to contest your point about "in the language of economists" because fundamentally (unlike doctors) economists have created a closed language that seals them off from understanding what they are missing.
Now much of this is due to the excesses of RBC theory and the excesses of micro-foundations - but nevertheless, it is the way it is. What others may propose as gaps are defined away repeatedly.
This shows up repeatedly in the case of elaborate mathematical models. Fortunately, before I became interested in social science questions I was an aerospace engineer and complex systems researcher, so I can notice and describe when math is being used to paper over assumption gaps.
However, few economists seem to have a language to inquire into even that kind of methodological issue, let alone more abstract questions about how various assumptions may in fact be loaded with value judgements about society or psychology.
(And of course, the problem is amplified because the economists not only try to have no language around value judgements, but they also often hew to the judgements of long dead moralists not borne out by evidence from the last 50 years of study in e.g. psychology.)
Shorter, pithier (maybe less attack dog?) version - most of the problems with economics actually reside in the biases present in the "language of economists" - so it's really hard to make progress on anything, because economists are seemingly particularly (much more so than physicists or doctors, for example) unaware of how their language shapes their thought.Delete
I'm not sure I follow; what about complex mathematics or a distinction between positive and normative uses of theory necessarily forces authors to gloss over assumptions or fail to acknowledge value judgments made? I generally think of mathematics as helpful in clarifying assumptions---showing precisely what is needed as premise is part of its beauty, after all.Delete
I do agree that the distinction between positive and normative is often muddied in uses of economics, but I don't see why it should be; it would be easy to distinguish between descriptive and normative utility functions/theories. I think the problem there is less to do with the language used by economists and more to do with hesitancy on the part of economists to consider that what a consumer would pick for herself in her present context may not be what is best for her, or to make interpersonal comparisons of welfare. In the absence of well-articulated reasons for believing descriptive utility (what is actually chosen) differs from normative utility (what should be chosen, in the agent's best interests), the default position seems to be to assume the two are the same, even to the point of modeling e.g. addiction as a rational process (as in the work of Gary Becker).
Anyway, I guess in short I think it would be perfectly easy to work with utility theory but carefully acknowledge assumptive gaps and positive/normative distinctions, and that if this is largely not done it says less about the language and more about the culture of the community.
This is deja vu all over again, or specifically, a return to the discussion of “The Superiority of Economists”. Simon’s argument about the need to use the language of your audience has opened up into whether the academic lords sufficiently appreciate the peasants or even deserve their lordship, etc.ReplyDelete
The narrower language question does not resolve itself into either/or. Yes, you should try to communicate in the language of your audience, and this applies to other social scientists talking to economists, as well as vice versa. But important ideas can be lost in translation, and part of communicating is conveying a bit of your own language as it is related to your thought structure. In the end it’s a compromise. I deal with that every day as a teacher. If I speak to students in academic jargon I lose them, not only cognitively but also, and more importantly, emotionally. They’ll lose interest and tune me out. But a certain amount of jargon is essential; without it you can’t really delve into the material. I’m suggesting that the challenge of a hermeneutically-oriented economic sociologist addressing economists is not different in kind from the problem of what sort of language to use in the classroom.
The larger problem, it seems to me, is that a sizeable portion of the economics profession views its academic identity in terms of methodology rather than subject matter and, worse, defends this by virtue of the supposed intrinsic superiority of this methodology. Thus constrained optimization by rational agents is not one entry-way into an analysis of the real world but the only adequate framework. I had an experience of this in my very first professional meeting. Back in 1982 I presented a paper at an AEA session of the ASSA which laid out my “planning capacity” theory of the firm (which I now recognize as neo-Schumpeterian), only to listen to a contemptuous response by my discussant (a well-known microeconomic theorist) that this didn’t even qualify as a theory of the firm, the way transaction costs did, because it did not rest on maximizing behavior. I was devastated at the time and took it personally, and only much later did I realize that the whole episode arose from a difference between two views of what economics is: I thought economics was about understanding observed institutions and behaviors in the economy, and he thought it was about the application of constrained optimization as a universal paradigm. You see the same thing today in the way the Lukas Critique is operationalized: establishing a behavioral model that permits private sector actors to respond nonrobotically to macropolicy is identical to adhering to a constrained optimization framework.
Not all economists share this rigidity of course. Many are quite willing to collaborate with other social scientists on terms that don’t privilege constrained optimization. Behavioral economics has helped in this respect, but I also think that cross-disciplinary work on applied problems has gained greater cachet. Maybe in a few decades this more open-minded view will spread throughout the profession, and we won’t need to have discussions like this. But making the case for an economics that plays well with others will be important during the interim.
Oops, make that Lucas. Too much time spent in central Europe.Delete
Indeed, is economics a normative or a positive science? This is the perpetual conflict of this field.Delete
"The larger problem, it seems to me, is that a sizeable portion of the economics profession views its academic identity in terms of methodology rather than subject matter and, worse, defends this by virtue of the supposed intrinsic superiority of this methodology."Delete
Identity. Another big variable that has all sorts of economic consequences but is not in neo-classical models.
I really hope that economists make an effort to engage with accumulated knowledge outside their discipline. Economic theory and theory will get much further by taking knowledge from these disciplines than by extending rational choice methodology into areas traditionally covered by political science and sociology; even if it means thinking another way. Gary Becker is not enlightening work.
In terms of identity and economists defining who they and justifying their place in their world by their methodology - with implications for exclusion and inclusion - Tony Yates's blog must be the penultimate example of this.Delete
Classic battle; Macro vs Micro. "application of constrained optimization as a universal paradigm" and I would be the latter time and time again. Nice explanation though and appreciated.
Apologies for this, but I wanted to bring this to your attention.
Check out Whalen's "analysis" 1:18 and after. I think it's a business insider's view of what's wrong with the economy and it is spectacularly ill-informed, he has the liquidity trap completely backwards. For the public record, it would be good if you could comprehensively demolish Whalen's fallacies. It starts from: "We've kept interest rates too low for too long, I think what Yellen has innocently done is create a liquidity trap... everyone's waiting for rates to rise, they are not investing, they are not spending, so income and GDP is slowly contracting..."
This guy has spent his career in finance, written books on money, debt, financial stability... and appears to be economically illiterate.
So does Oxford have a BA in Economics? If not why?ReplyDelete