Posts Tagged ‘economic’

Jeff Wall, “A Sudden Gust of Wind (after Hokusai)” (1993)

Uncertainty is all the rage right now, with a wide variety of economists and central bankers “discovering” its disturbing effects in the midst of the current crises of capitalism.

But I’ll bet it’s just a passing fad. As soon as things return to normal, uncertainty will be put back on the shelf and, once again, be tamed and domesticated.

As I’ve shown many times over the last few years, the failure of mainstream economics has prompted a rediscovery of uncertainty—not unlike during the First Great Depression when Keynes argued that investors were subject to fundamental uncertainty (as against probabilistic risk) and therefore guided not by rational calculation but by “animal spirits.”*

The latest to announce the relevance of uncertainty is Andy Haldane [ht: sb], Executive Director for Financial Stability at the Bank of England—who, according to Ismail Erturk et al., has become the bank’s “radical house intellectual who, through his interventions after the crisis, has become the darling of the intelligentsia.”

On one hand, there’s something refreshing about Haldane’s critique of mainstream economics.

The notion of not knowing, of imperfect information, of uncertainty (as distinct from risk) got lost from economics and finance for the better part of 20 or 30 years. . .

I think one of the great errors we as economists made in pursuing that was that we started believing the assumptions of economics, and saying things that made no intellectual sense. The hope was that, by basing models on mathematics and particular assumptions about ‘optimising’ behaviour, they would become immune to changes in policy. But we forgot the key part, which is that the models are only true if the assumptions that underpin those models are also true. And we started to believe that what were assumptions were actually a description of reality, and therefore that the models were a description of reality, and therefore were dependable for policy analysis.

On the other hand, Haldane’s critique is quite limited, in at least two senses. First, it’s haunted by a nostalgia for a better time, before the neoclassical synthesis, and thus harkens back to the work of Hayek, Keynes, and Friedman, who “were all some hybrid of economist, sociologist, mathematician, political scientist and philosopher” and understood that “our socio-economic knowledge might be deeply imperfect.” Second, it quickly moves beyond the problem of uncertainty, by attempting to replace the physics-inspired certainty of the neoclassical synthesis with the life-sciences certainty of evolution. So, in the end, he really does know what happened:

For example, the notion of ‘too big to fail’ is a form of evolutionary equilibrium founded in a set of self-reinforcing state interventions, each of which individually made sense. Because if a bank goes bust, it may make perfect sense for a government to ride to the rescue, which in turn gives rise to a set of incentives for those running the banks, which makes the next bank failure even bigger, which states then have to deal with. This creates a ‘too big to fail equilibrium’. And therefore to tackle that evolutionary problem you need to break the cycle. In the case of banks, you can fine them, you can regulate their behaviour, but unless and until this structure of incentives is altered, to change this fundamentally, you won’t reverse the cycle.

In the end, Haldane’s critique is really only aimed, looking backward, at the uncertainty concerning the particular set of assumptions of the neoclassical synthesis. Moving forward, it leaves open the door for a new science of economics and a new warrant for certain economic knowledge—to understand and then regulate the banking system—based on evolution and complex systems. In that world, the only role for uncertainty is to create the conditions for a new kind of authority.

Mistakes will be made – that is in the nature of public policy. The important thing is that they are made, when they are made, for the right reasons. That they’re honest mistakes, they’re technical mistakes, that anyone could have made given how uncertain the world is. That’s what protects you. That’s what gives you authority. It sounds perverse that admitting to mistakes can be credibility enhancing, can be authority enhancing. But my very strong view is that that is the only thing which can protect you, can enhance understanding and therefore authority.

In Haldane’s world, uncertainty is a problem that can be explained (with the correct set of models) and then used (e.g., by the Bank of England) to create a new kind of regulatory authority. It is precisely not an issue of “undecidability” or “indeterminacy” that challenges the pretenses and protocols of modern economic knowledge.

Thus, I am quite certain that, once again, it will be put back in the box—once Haldane and others believe that the gust of wind has passed, the regulators’ control has been reasserted, and the banks return to business as usual.

*This is radically different from the current mainstream-economists-for-Team-Republican focus on policy uncertainty, which is just another way of arguing for continuing the Bush-era tax cuts for wealthy individuals and large corporations. Mike Konczal does a good job taking apart the mainstay of their approach, the economic policy uncertainty index.

There is a tremendous need to occupy economics, given the complicity of mainstream economics in creating the current crises and the limited nature of the debate concerning economic alternatives within mainstream political and economic circles in the United States.

One of the most interesting projects to occupy (or reoccupy) economics has been taking place within the Occupy Wall Street movement. Since last fall—first in Zuccotti Park, and now in Union Square, in groups large and small—people have been coming together, within the context of the Occupy University, to discuss a wide range of economic issues and concerns.

We discuss inequality in the US and around the world, who are the 1% and what does it take to get there, what is the relationship between the banks and the Federal reserve, how the financial crisis got going, what’s happening in Europe and “Why can’t I find a good job?”. We also talk about alternatives, from coops and credit unions to open source to what a democratic economy looks like.

The courses in Radical Economics 101 have been organized every Sunday by the committed efforts of Maliha Safri of Drew University and Suresh Naidu of Columbia University. Recently, they’ve been joined by Mark Brenner from Labor Notes.

Let’s chant together: “Tell me what economics looks like! This is what economics looks like!”

Rod Hill and Tony Myatt, in an interview conducted by Philip Pilkington, explain what students learn—and don’t learn—in mainstream introductory economics courses.

PP: The issue of power is an interesting one. I think what many students who feel instinctively critical of economics courses note from the outset is that the theories taught imply some sort of level playing field. Yet, you would have to be blind not to notice divisions of class and race in even the most prosperous societies. Could you talk about this a bit?

Rod Hill: I think power is central to understanding the reality of economic life. For that reason, it’s important that it be effectively obscured in the principles texts as students are taught how to ‘think like an economist’. The texts typically manage this very well, although I’m sure their authors have no conscious intention to set out to do this. (This remarkable aspect of our propaganda system helps to make it so effective.)

The texts do indeed imply a sort of ‘level playing field’ between buyers and sellers in both markets for goods and services as well as in the labour market. This follows from the central place that’s given to the supply and demand model (which is “short-hand” for the perfectly competitive market).

There, everyone is a ‘price taker’. There is no room for businesses to use their bargaining power to squeeze workers’ wages, to prevent workers from unionizing, to force down their suppliers’ prices, or to raise their selling prices once they’ve eliminated their competition. (Think Walmart.) . . .

PP: You say that no alternative models are taught in the classroom. I’ve heard this criticism raised many times before and it has always struck me as rather strange. In just about every other social sciences class it is a prerequisite that the lecturer teach the major different approaches, to do otherwise would be considered biased. In your opinions, how do economists get away with this where others cannot?

Tony Myatt: Well, we need to be careful here. Other models of market structure besides perfect competition are taught. Monopoly, monopsony, imperfect competition, and oligopoly are all taught. But they are placed towards the end of the book. Later, when we need to explain the distribution of income, or the benefits of trade, the texts return to assuming perfect competition, to the demand and supply framework, as if that intervening stuff never happened. The argument is that perfect competition is simpler, and is good enough as a first approximation to all markets. But perfect competition is actually a lot more complicated than monopoly. Why not apply monopoly as a first approximation? But that would have a huge ideological impact. It would mean that power, cronyism, and exploitation are potentially important. It would mean that the economy doesn’t necessarily operate efficiently (as a first approximation), and that unions don’t necessarily cause inefficiencies. It would mean that there is a potentially much bigger role for government regulation. And the point is, when discussing a particular topic – international trade say – the texts don’t say “if we assume perfect competition we get these predictions; if we assume imperfect competition we get these predictions; now let’s compare the predictions to the facts”. This is thought to be too complicated, too advanced. But this is a cop out, a dereliction of duty, and is inconsistent with the methodology which the textbooks purport to endorse.