Posts Tagged ‘economics’

Murner.Nerrenbeschwerung.kind

Mainstream economics has been a disaster, especially since the crash of 2007-08. It wasn’t able to predict the onset of the crisis. It didn’t even include the possibility of such a crisis. And it certainly hasn’t been a reliable guide to getting out of the crisis.

And yet economist after economist has been stepping forward—even on the liberal side of things—to try to convince us that things are pretty much OK in the land of mainstream economics.

Just the other day, Paul Krugman tried to convince us that, leaving aside the failure to predict the crisis or even envisioning the possibility of a crisis occurring, mainstream models “did a pretty good job of predicting how things would play out in the aftermath.” The problem, for Krugman, all comes down to the “bad behavior” of some economists who have been more interested in defending partisan turf than in getting things right.

Now, Mark Thoma wants to argue that the macroeconomic models—including the “dynamic stochastic general equilibrium” models that have become the stock-in-trade of mainstream macroeconomics for the past couple of decades—are just fine. The problem, as Thoma sees it, is not with the theory or the models but with the questions economists have been asking.

What neither Krugman nor Thoma wants to admit is those very same models—hydraulic IS-LM in the case of Krugman, the rational expectations, dynamic optimizing, and representative agents of DSGE—actually direct the behavior of economists and delimit the questions they can ask. Those models are so many theoretical lenses on the world, which determine how the economists who use them interpret the world.

I understand: Krugman and Thoma desperately want to keep the precious baby. But that also means we’re stuck with the increasingly dirty bathwater.

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You know the story: Xi and his San tribe are “living well off the land.” They are happy because of their belief that the gods have provided plenty of everything, and no one among them has any wants. One day, a Coca-Cola bottle is thrown out of an airplane and falls to Earth unbroken. But the bottle eventually causes unhappiness within the tribe, leading the elders to believe it’s an “evil thing” which the gods were “absent-minded” to send them. Xi then travels to  the edge of the world and throws the bottle off the cliff. He then returns to his tribe and receives a warm welcome from his family.

I wonder if Paul Krugman expects to receive a warm welcome from the economics family after throwing the prediction bottle over the cliff.

Hardly anyone predicted the 2008 crisis, but that in itself is arguably excusable in a complicated world. More damning was the widespread conviction among economists that such a crisis couldn’t happen. Underlying this complacency was the dominance of an idealized vision of capitalism, in which individuals are always rational and markets always function perfectly.

I actually agree with Krugman on this point. Economic prediction is, in fact, impossible and the really crazy feature of mainstream economic models is the fact that endogenous crises simply can’t occur. Exogenous factors, sure, but nothing internal to the models can lead to a crash. Their idealized vision of capitalism, absent an external event (such as a credit crunch or an increase in the price of oil), simply leads to a full-employment, price-stable equilibrium.

But, wait, doesn’t the entire edifice fall when—on its own terms—the ability to correct predict is dispensed with? The whole rationale of giving up realistic assumptions about the economic system has been the ability to accurately and correctly predict the movements of the economy. That’s the mantle of predictive science that has been used, since at least the mid-1950s, to expunge all other economic theories and approaches from the discipline.

Mainstream economists can’t have it both ways: to celebrate their models for their predictive ability and then to dispense with prediction when, as in 2007-08 (just as in 1929), their models clearly failed. We need something better.

As for their track record since the crisis broke out, well, they haven’t fared much better—at least to judge by where we stand right now. Krugman, for his part, wants to stick with the hydraulic mechanisms of the textbook economic models, which “did a pretty good job of predicting how things would play out in the aftermath,” and declare that “too many influential” economists must be crazy.

rethinkecon

The Rethinking Economics conference starts this morning in New York City.

Here’s a link [pdf] to the schedule. The live-stream can be found here.

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Special mention

August 31, 2014 wuc140903-605_605

 

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This, according to the Obama administration, is what “a broad array of ideological views” [ht: br] looks like:

  • Paul Krugman (Princeton University), Alan Blinder (Princeton University), Claudia Goldin (Harvard University), Anat Admati (Stanford University), Erik Brynjolfsson (Massachusetts Institute of Technology), and Roland Fryer (Harvard University), who were among the economists invited to have lunch with President Obama on 18 June; and
  • Martin Feldstein (Harvard University), Robert Hall (Stanford University), Ben Bernanke (former Federal Reserve Chairman), Edward Glaesar (Harvard University), Luigi Zingales (University of Chicago), Kevin Hassett (American Enterprise Institute), and Melissa Kearney (the Hamilton Project), who were invited for lunch yesterday.

Apparently, that’s what we’ve come to in this country, when “consulting a wide variety of perspectives” is in fact limited to a discussion within a narrow range, from the extreme right to mainstream liberalism. No one who actually offered a real sense of the impending crisis before 2007-08. Nor anyone who is critical of capitalism and is seriously thinking about alternative economic institutions.

The problem is not just that Obama is only listening to a narrow set of views. The list of invitees to the two gatherings also serves as an official stamp of approval—that these economists’ views are worth listening to, and all other approaches to economic analysis can be safely marginalized.

 

Off today to give a talk on “Culture Beyond Capitalism” in the opening session of the 18th International Conference on Cultural Economics, sponsored by the Association for Cultural Economics International, to be held at the University of Quebec in Montreal.

I plan to start my multimedia presentation on how “culture offers to us a series of images and stories—audio and visual, printed and painted—that point the way toward alternative ways of thinking about and organizing economic and social life” with the original 1928 version of Harry McClintock’s “Big Rock Candy Mountains.”

Where they hung the jerk
That invented work
In the Big Rock Candy Mountains.

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After learning that Joseph Stiglitz had been invited to give a lecture on inequality at the University of Oxford, I asked my friend Stephen Whitefield, Professor of Politics, University Lecturer in Politics, and Rhodes Pelczynski Tutorial Fellow in Politics, Pembroke College, to offer his sense of Stiglitz’s lecture. I am pleased to publish his comments here.

It was a huge pleasure for me and my college (Pembroke) and my Department (Politics and International Relations), with the support of the UK Fulbright Commission, to welcome Joseph Stiglitz back to the University of Oxford to deliver the 4th Annual Fulbright Distinguished Lecture. Stiglitz had been Drummond Professor of Political Economy in Oxford in the 1970s. Of course, he won the Nobel Prize for his work that shows, as I understand it, that when markets don’t function with perfect information—that is to say, almost always–then there is also always room for government intervention to improve welfare outcomes. That was a huge turn in the debate, even if many mainstream economists and their political allies/masters have yet to catch up.

Stiglitz was in Oxford to talk about “The Causes and Consequences of Inequality and What Can Be Done About It,” which topic marks another great turn in the debate about what kind of political economy we want, from thinking that inequality is irrelevant, since all boats are rising, to thinking that inequality matters, because it makes just about everything worse, at least when it is at very high levels. Stiglitz was of course also central to shifting the current of academic opinion on this topic. And he demonstrated in a brilliant talk—which everyone can link to here (as a podcast or video)—that he is not averse to turning that scholarship into powerful and persuasive accessible language. I have also to add that Stiglitz is a great person to talk to. As Ngaire Woods, his old friend, said in her introduction to his lecture, Stiglitz listens to people.

So, I know he will not be at all put out if he reads me to say that, while his dissection of the causes and consequences of inequality was outstanding, his discussion of what can be done about them was rather light. I told him that myself at dinner afterwards, as did others. I am sure that a lot of that would have been sorted out if he had had more time to talk. After all, he is not at all short of policy prescriptions, as are others like Thomas Piketty, who advocates a global wealth tax. But the problem is not that there is a lack of policies to put forward. In my view, the main problem is with the lack of a clear vision about how to build the political alliances that are necessary to enact those prescriptions. Maybe Stiglitz is right that things look better in places like Brazil and that we can learn things from its experience. Becoming Swedish, however, even if we thought that an attractive proposition—and I still have Per Wahloo in mind when thinking about Swedish Social-Democracy—is just not an option. So, how do we create a winning coalition against inequality that looks plausible and appropriate to our national conditions?

Well, I don’t know the answer to that right now. But here is a gesture in that direction. First, an irony—that he gave this talk in Oxford where we are of course constantly seeking the support of the 0.01-percenters, including to fund a chair to commemorate Senator Fulbright in my college and department. There were a number of such people in the lecture theatre. But note next something we all know (or strongly believe since Wilkinson and Pickett), that in highly unequal societies even the richest 1 percent appear to have worse health outcomes compared to their counterparts in more equal societies. Stiglitz did not offer a very convincing explanation as to why this is the case. He put it down to stress, which is possible but not very plausible on the face of it. Susan Kelly, who is a medical sociologist at the University of Exeter, puts a more likely hypothesis to my mind: over-treatment. There is apparently a negative correlation at the top end between numbers of physicians and health outcomes. But, who knows? A good question to research. . .

But, to return to my point about the political coalition to implement a reduction in levels of inequality, what we need to know is this: who are the political actors interested in doing this? This was not addressed in any explicit way by Stiglitz, and it seems to me a characteristic of even progressive policies presented by scholars that the questions of who will implement them and in whose political interests they are enacted are seldom on the table. There is talk—just—in analyses of inequality of class but not much about class interests or class actors. Now, there was an implicit answer in Stiglitz’s talk. Perhaps it is the enlightened rich who will use their massive power to reduce inequality, because they will come to see that it is harmful to their interests. Maybe. I have my doubts. Certainly I would not expect inequality to come down to the levels that I would find economically, socially, or politically appropriate if those were the political forces driving it.

But if not the rich, then who? By the admission of all involved in the analysis of inequality, the period from around 1930 to 1980 was one of declining inequality and of course in the post-WWII period of rapid economic growth as well. A time also, not coincidentally, of strong organised trade unions and a mobilised working class. All that is recognised. Less so is the counterpart in international relations, the existence of the Soviet Union and then the Communist bloc and the international communist movement, which presented an alternative to capitalism that many working-class people found attractive and the rich found terrifying enough to make significant concessions. I suspect it takes a stick as well as a carrot to make the rich see their self-interest differently.

Almost all of that historical moment is gone now, and not all for the bad. As a student of the Soviet system, I only lament it when thinking about the appalling kleptocracy that emerged from its womb, to use Marx’s kind of metaphor—a kleptocracy that aspired to be as rich as our own oligarchs. But we should remember that the creation of unions and left movements was the work of generations of intellectuals—I mean that in the broadest Gramscian terms—to create not just policies but first and foremost social and political actors. Perhaps that is what we now need to concentrate on imagining, not to mention doing.