How should academic economics cope with ideological bias

This question was prompted by this study by Mohsen Javdani and Ha-Joon Chang, which tries to show two things: mainstream economists are biased against heterodox economists, and also tend to favour statements by those close to their own political viewpoint, particularly on the right. I don’t want to talk here about the first bias, or about the merits or otherwise of this particular study. Instead I will take it as given that ideological bias exists within mainstream academic economists (and hereafter when I just say ‘academic economics’ I’m only talking about the mainstream), as it does with many social sciences. I take this as given simply because of my own experience as an economist.

I also, from my own experience, want to suggest that in their formal discourse (seminars, refereeing etc) academic economists normally pretend that this ideological bias does not exist. I cannot recall anyone in any seminar saying something like ‘you only assume that because of your ideology/politics’. This has one huge advantage. It means that academic analysis is judged (on the surface at least) on its merits, and not on the basis of the ideology of those involved.

The danger of doing the opposite should be obvious. Your view on the theoretical and empirical validity of an academic paper or study may become dependent on the ideology or politics of the author or the political implications of the results rather than its scientific merits. Having said that, there are many people who argue that economics is just a form of politics and economists should stop pretending otherwise. I disagree. Economics can only be called a science because it embraces the scientific method. The moment evidence is routinely ignored by academics because it does not help some political project economics stops being the science it undoubtedly is.

Take, for example, the idea - almost an article of faith in the Republican party - that we are on the part of the Laffer curve where tax cuts raise revenue. The overwhelming majority, perhaps all, of academic economic studies find this to be false. If economics was merely politics in disguise, this would not be the case. This is also what distinguishes academic economics and some of the economics undertaken by certain think tanks, where results always seem to match the political or ideological orientation of the think tank.

There is a danger, however, in pretense going too far. This can be particularly true in subjects where empirical criticism of assumptions or parameterisation is weak. I think this was the basis of Paul Romer’s criticism of growth theory and microfoundations macro for what he calls mathiness, and by Paul Pfleiderer for what he calls ‘chameleon models’ in finance and economics. If authors choose assumptions simply to derive a particular politically convenient result, or stick to simplifications simply because it produces results that conform to some ideological viewpoint, it seems absurd to ignore this.

Romer’s discussion suggests that it is at least possible for ideological bias to send a branch of economics off in the wrong direction for some time. I would argue, for example, that Real Business Cycle theory in business cycle macro, which was briefly dominant around 40 years ago, was in part influenced by a desire among those who championed it to look for models where policy had little role. In addition, it showed up economists tendency to ignore other social sciences, or even common sense, at its worse. [1] It didn’t last because explaining cycles is so much easier when you assume sticky prices, as most macroeconomists now do, but it may be possible that other aspects of mainstream economics may be ideologically driven and persist for a much longer time (Pareto optimality?), and mainstream economists should always be aware of that possibility. One of my first posts was about the influence of ideology on the reaction of some economists to Keynesian fiscal stimulus.

The basic problem arises in part because empirical results are never clear cut and conclusive. For example the debate about whether increases in the minimum wage reduce employment continues, despite plenty of empirical work that suggests it does not, because there is some evidence that points the other way. This opens the way for ideology to have an influence. But the political implications of academic economics will always mean that ideology plays a role, whatever the evidence. Even when evidence is clear, as it is for the continuing importance of gravity (how close two countries are to each other) for trade for example, it is possible for an academic economist to claim gravity no longer matters and gain a huge amount of publicity for their work that assumes this. This is an implication of academic freedom, although in the case of economics, I still think there is a role for an organisation like (in the UK) the Royal Economic Society to point out what the academic consensus is.

Does this mean economics is not a true science? No, because ideological influence does not trump data when the data is very clear, as in the case of the Laffer curve or gravity equations, although ideology and academic freedom may allow the occasional maverick to go against the consensus. That in turn means that it is important for any user of economics to be aware of possible ideological bias, and always establish what the consensus is, if it exists, on an issue. Could ideology influence the direction particular areas of economics take for some time? The evidence cited above suggests yes. So while I have no quarrel with the pretense that ideology is absent from academic economics in formal discourse, academics should always be aware of its existence. In this respect, some of the points that the authors of this study mention in the discussion section of their paper are relevant. 

[1] This reflected the introduction of a microfoundations methodology which soon began to dominate the discipline, and which I have talked about elsewhere (e.g. here and here).

What are populist policies?

Populist is a term like neoliberalism: vaguely defined and used as a derogatory term. A key aspect of populism involves attacks against elites, and as Jan-Werner Müller stresses this goes with populists identifying with ‘the people’. The populist does not want any kind of direct democracy, but instead argues that they (and only they) are uniquely qualified to ensure that the will of the people prevails. This ties in both with identity politics, but also an emphatic denial of the importance of different people with different interests.

But populist is a term used about policies as well as certain political leaders, and is often applied to policies proposed by conventional (not populist) leaders. Is this simply a term of abuse, or is there some systematic logic behind such claims? I do not think those that use the idea of a populist policy simply mean a policy that might be invoked by a populist politician. 

I can think of two meanings, beyond the obvious that populist policies have to be popular. The first is that a populist policy is harmful to society on average, even though it might be beneficial to a significant sub-group within society. The second is stronger: a policy that will be harmful to almost everyone. Economists will see the parallel with Kaldor Hicks and Pareto welfare measures. I want to suggest that in practice only the second, stronger version has any teeth.

One set of policies that are frequently called populist in the first sense are specific trade barriers, designed to protect a particular domestic industry against foreign competition. These are obviously popular with those whose jobs are threatened. Using populist in the first sense notes that the economy as a whole gains from cheaper imports, and these gains are large enough to compensate the losers in the domestic industry such that everyone could be better off. But to use populist as a derogatory term in this context only really makes sense if the transfers that would compensate the losers are sufficient to do so, and fairly certain to be enacted. If they are not, then maybe trade protection measures are popular because people really do want to avoid the pain caused by domestic job losses, and are prepared to forgo any gains to see that happen.

Brexit would seem to be a good example of a populist policy in the second sense, where the number of people who will actually gain from the measure are pretty small. Its popularity comes from people incorrectly thinking they will be no worse off as a result of Brexit, when in truth they will be (or indeed they already are, as the Brexit induced depreciation feeds into higher prices and, almost certainly, lower real wages). Before the vote, polls showed that a large proportion of those intending to vote to leave the EU were not expecting to be worse off as a result, and more importantly they would vote differently if they thought they would be worse off, a result recently confirmed by a YouGov poll reported in the Guardian. In my view that was what made the media’s trashing of the economic case against leaving so crucial: it is what made Brexit a populist policy in the sense that I want to use the term.

Is Brexit an example of a populist policy promoted by non-populist politicians? Only in part. Major drivers behind Brexit were the right wing tabloid press and UKIP. They are clearly populist using Müller's criterion, as they show every time they invoke the ‘will of the people’ to attack judges who are simply trying to uphold the rights of parliament.

A clearer UK example of a populist policy driven by non-populist politicians might be austerity. This was popular, in the sense that most people thought the government ought to tighten its belt because it had maxed out its credit card, but it also did most people a lot of harm. I calculated that UK austerity lost the average UK household at least £4,000, and the true figure could easily be two or three times that, and it is difficult to see a large section of the population who gained.

Do populist policies promoted by conventional (non-populist) politicians have anything to do with the rise of populist politicians? Perhaps they do, when it turns out that populist policies do in reality make people worse off. That can discredit conventional politicians and open the doors to populists. I provide one example of that in this SPERI post, which links Brexit to austerity.

Pareto, Inequality and Government Debt

Or is economics inherently right wing?

I noted in passing in an earlier post that Pareto efficiency was obviously not a value free criteria. So those who argue that economists should only look for Pareto improvements – changes where no one is made worse off – are making a value judgement. One, and only one, of its implicit normative assumptions is that inequality does not matter. For others see, for example, Elizabeth Anderson (pdf, HT Anon). Now you could argue that an assumption that inequality does not matter intrinsically is at least internally consistent with the conventional assumption that personal utility depends only on personal variables. However as that assumption is clearly incorrect, this is a rather weak defence.

(You could also reasonably argue that Pareto improving increases in inequality could have a negative impact on the personal variables of others that conventional economic analysis ignores. So, for example, rising incomes of the 1% - even if this initially comes from just increasing the size of the pie - allows that 1% greater political power, which they will subsequently use to redistribute income away from the 99%.)

This is hardly a new point. For just two recent examples of other posts saying the same thing: Richard Serlin here, and Ingrid Robeyns here. It only has to keep being said because too many students are taught that economists like the Pareto criteria because it is value free. One of the comments to that second post says that the task should not be to “import liberal or left-wing moral philosophy into economics. It’s to scrub right-wing, libertarian moral philosophy out of it.” Well, in my usual moderate manner, I’d say we should at least expose it.

A more sophisticated defence of Pareto optimality is the second welfare theorem, which says that we can separate issues of distribution from issues of allocative efficiency. So, if some Pareto improving measure only makes the 1% better off, we can go ahead with it and deal with any reduction in social welfare generated by additional inequality using lump sum transfers. One obvious problem with this idea is that there are no lump sum transfers. Another is that we do not as a society decide at some date every year what the optimal distribution of income to implement is. In practice the only chance of reversing any inequality created by a Pareto improving measure is to use compensation alongside that measure, but then agents will recognise this connection which in turn will influence incentives.

The only possibly original point I wanted to make here is that the absurdity of restricting policies to Pareto improvements becomes immediately apparent if we think about government debt. Measures to reduce currently high levels of debt will almost certainly make current generations worse off, because they will have to pay the taxes (or whatever) to get debt down. Yet I do not often hear people arguing that we have to let debt stay high because the government can only implement Pareto improvements. If you think about it for a second, restricting government debt policy to Pareto improvements would be a sure fire recipe for deficit bias.

While this may be obvious, textbooks still make a big deal of dynamic inefficiency. This is the idea that the amount of productive capital in society can be too high, so that too much output is going to preserving that level of capital (replacement investment to offset depreciation etc), and not enough to consumption. If that is true, then if the current generation saves less, everyone can be made better off. Government intervention to discouraging saving would be a Pareto improvement: the current generation consumes more because they save less, but future generations consume more because less output needs to go to replacement investment.

The symmetrical case is where there is too little capital, which also reduces long run consumption compared to what could be achieved. Yet the implication in many textbooks is that this case is not one we should worry about, because to change it (by raising saving) would make the current generation worse off and is therefore not a Pareto improvement. The discussion in Romer, for example, is all about whether economies are dynamically inefficient rather than sub-optimally small. We don’t think this way about government debt, so why should we when it comes to productive capital?

Why is there this emphasis on only looking at Pareto improvements? I think you would have to work quite hard to argue that it was intrinsic to economic theory - it would be, and is, quite possible to do economics without it. (Many economists use social welfare functions.) But one thing that is intrinsic to economic theory is the diminishing marginal utility of consumption. Couple that with the idea of representative agents that macro uses all the time (who share the same preferences), and you have a natural bias towards equality. Focusing just on Pareto improvements neutralises that possibility. Now I mention this not to imply that the emphasis put on Pareto improvements in textbooks and elsewhere is a right wing plot - I do not know enough to argue that. But it should make those (mainstream or heterodox) who believe that economics is inherently conservative pause for thought.