Posts Tagged ‘Nobel Prize’

I cringe when I listen to or watch these interviews. But here it is, with the Real News Network.

The interview was based on my recent blog post, “Economics of poverty, or the poverty of economics.”

I also want to recommend a recent piece by Ingrid Harvold Kvangraven [ht: ms], who argues that

The interventions considered by the Nobel laureates tend to be removed from analyses of power and wider social change. In fact, the Nobel committee specifically gave it to Banerjee, Duflo and Kremer for addressing “smaller, more manageable questions,” rather than big ideas. While such small interventions might generate positive results at the micro-level, they do little to challenge the systems that produce the problems.

For example, rather than challenging the cuts to the school systems that are forced by austerity, the focus of the randomistas directs our attention to absenteeism of teachers, the effects of school meals and the number of teachers in the classroom on learning. Meanwhile, their lack of challenge to the existing economic order is perhaps also precisely one of the secrets to media and donor appeal, and ultimately also their success.

Exactly!

It’s the revenge of neoclassical economics, as reflected in this year’s prize in economics, which focuses attention on poor people’s “bad” decisions and away from the structural causes of poverty.

As I argued the other day on Twitter, it’s like saying the climate crisis will be solved by individuals turning off lights and recycling their garbage. Not bad things to do, certainly. But, together, all those individual efforts make up only 1-2 percent of the solution. The climate crisis cannot be solved unless and until we direct attention to the real, structural causes. Here, I’m thinking not only of the fossil fuel industry, but also the way the rest of contemporary capitalist economies are organized around the use of fossil fuels—in the production of goods and services, cars as well as digital information. Such a system generates enormous profits, which flow to a tiny group at the top, and continues to destroy the commons, where most of us live and work.

It’s that system that needs to be radically transformed. And as long as economists are lauded for focusing on technical issues around the margins and not on the real causes—of Third World poverty, global warming, and much else—the discipline of economics will continue to be impoverished.

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Yesterday, the winners of the 2019 winners of the so-called Nobel Prize in Economics were announced. Abhijit Banerjee, Esther Duflo, and Michael Kremer were recognized for improving “our ability to fight global poverty” and for transforming development economics into “a flourishing field of research” through their experiment-based approach.

The Royal Swedish Academy of Sciences declared:

This year’s Laureates have introduced a new approach to obtaining reliable answers about the best ways to fight global poverty. In brief, it involves dividing this issue into smaller, more manageable, questions–for example, the most effective interventions for improving educational outcomes or child health. They have shown that these smaller, more precise, questions are often best answered via carefully designed experiments among the people who are most affected.

As every year, mainstream economists lined up to laud the choice. Dani Rodrik declared it “a richly deserved recognition.” Richard Thaler, who won the award in 2017 (here’s a link to my analysis), extended his congratulations to the Banerjee, Duflo, and Kremer and to the committee “for making a prize that seemed inevitable happen sooner rather than later.” While Paul Krugman, the 2008 Nobel laureate, refers to it as “a very heartening prize—evidence-based economics with a real social purpose.”

Nothing new there. To a one, mainstream economists always use the occasion of the Nobel Prize to applaud themselves and their shared approach to economic and social analysis—a celebration of private property, free markets, and individual incentives.

What is novel this time around is that the winners include the first woman economist to win the prize (Duflo) and only the third non-white economist (Banerjee).*

But what about the content of their work? I’ve discussed the work of Duflo and Banerjee on numerous occasions on this blog (e.g., here, here, and here).

As it turns out, I’ve written a longer commentary on the “new development economics” as part of a symposium on my book Development and Globalization: A Marxian Class Analysis, which is forthcoming in the journal Rethinking Marxism.

I begin by noting that idea of Banerjee, Duflo, Kremer and the other new development economists is that asking “big questions” (e.g., about whether or not foreign aid works) is less important than the narrower ones concerning which particular development projects should be funded and how such projects should be organized. For this, they propose field experiments and randomized control trials—to design development projects such that people can be “nudged,” with the appropriate incentives, to move to the kinds of behaviors and outcomes presupposed within mainstream economic theory.

Here we are, then, in the aftermath of the Second Great Depression—in the uneven recovery from capitalism’s most severe set of crises since the great depression of the 1930s and, at the same time, a blossoming of interest in and discussion of socialism—and the best mainstream economists have to offer is a combination of big data, field experiments, and random trials. How is that an adequate response to grotesque and still-rising levels of economic inequality (as shown, e.g., by the World Inequality Lab), precarious employment for hundreds of millions of new and older workers (which has been demonstrated by the International Labour Organization), half a billion people projected to still be struggling to survive below the extreme-poverty line by 2030 (according to the World Bank), and the wage share falling in many countries (which even the International Monetary Fund acknowledges) as most of the world’s population are forced to have the freedom to sell their ability to work to a relatively small group of employers for stagnant or falling wages? Or, for that matter, to the reawakening of the rich socialist tradition, both as a critique of capitalism and as a way of imagining and enacting alternative economic and social institutions.

I go on to raise three critical issues concerning the kind of development economics that has been recognized by this year’s Nobel prize. First, the presumption that analytical techniques are neutral and the facts alone can adjudicate the debate between which development projects are successful and which are not is informed by an epistemological essentialism—in particular, a naïve empiricism—that many of us thought to have been effectively challenged and ultimately superseded within contemporary economic and social theory. Clearly, mainstream development economists ignore or reject the idea that different theories have, as both condition and consequence, different techniques of analysis and different sets of facts.

The second point is that class is missing from any of the analytical and policy-related work that is being conducted by mainstream development economists today. At least as a concept that is explicitly discussed and utilized in their research. One might argue that class is lurking in the background—a specter that haunts every attempt to “understand how poor people make decisions,” to design effective anti-poverty programs, to help workers acquire better skills so that they can be rewarded with higher wages, and so on. They are the classes that have been disciplined and punished by the existing set of economic and social institutions, and the worry of course is those institutions have lost their legitimacy precisely because of their uneven class implications. Class tensions may thus be simmering under the surface but that’s different from being overtly discussed and deployed—both theoretically and empirically—to make sense of the ravages of contemporary capitalism. That step remains beyond mainstream development economics.

The third problem is that the new development economists, like their colleagues in other areas of mainstream economics, take as given and homogeneous the subjectivity of both economists and economic agents. Economists (whether their mindset is that of the theoretician, engineer, or plumber) are seen as disinterested experts who consider the “economic problem” (of the “immense accumulation of commodities” by individuals and nations) as a transhistorical and transcultural phenomenon, and whose role is to tell policymakers and poor and working people what projects will and not reach the stated goal. Economic agents, the objects of economic theory and policy, are considered to be rational decision-makers who are attempting (via their saving and spending decisions, their participation in labor markets, and much else) to obtain as many goods and services as possible. Importantly, neither economists nor agents are understood to be constituted—in multiple and changing ways—by the various and contending theories that together comprise the arena of economic discourse.

The Nobel committee has recognized the work of Banerjee, Duflo, and Kremer as already having “helped to alleviate global poverty.” My own view is that it demonstrates, once again, the poverty of mainstream economics.

 

*The only other woman, in the 50-year history of the Nobel Prize in Economics, was Elinor Ostrom (2009), a political scientist; the other non-white winners were Sir Arthur Lewis (1979) and Amartya Sen (1998).

 

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The dystopia of the American healthcare system certainly invites a utopian response—a ruthless criticism as well as a vision of an alternative.

As I showed last week, the left-wing response involves a critique of the conditions and consequences of the capitalist organization of U.S. healthcare and the fashioning of a radical alternative. Single-payer, which uses tax revenues to finance the purchase of adequate healthcare services for everyone, is one possibility. On top of that, it is necessary to expand the diversity of healthcare providers, which would include more democratic, cooperative or worker-owned healthcare enterprises.

That’s how activists, educators, and policymakers informed by heterodox economics can begin to rethink the U.S. healthcare system. What about mainstream economics?

Given the persistent attacks on and attempts to replace Obamacare by Republican legislators—against a “government takeover” of healthcare in the name of “free markets”—one would expect mainstream economists to provide a theoretical justification based on their usual utopianism—of an efficient allocation of scarce resources in an economy characterized by private property and individual decisions in unregulated markets.

However, as it turns out, they can’t. And that’s all because of Kenneth Arrow.

Consider, for example, the 2017 New York Times column by Greg Mankiw.

In Econ 101, students learn that market economies allocate scarce resources based on the forces of supply and demand. In most markets, producers decide how much to offer for sale as they try to maximize profit, and consumers decide how much to buy as they try to achieve the best standard of living they can. Prices adjust to bring supply and demand into balance. Things often work out well, with little role left for government. Hence, Adam Smith’s vaunted “invisible hand.”

Yet the magic of the free market sometimes fails us when it comes to health care.

Mankiw, who is known to celebrate free markets in everything, is forced to allow for an exception when it comes to healthcare. (Fellow mainstream economist John Cochrane, in a sharp riposte, argued that “For once, I think Greg got it wrong.”)

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The reason is because, back in 1963, future Nobel Laureate Arrow published “Uncertainty and the Welfare Economics of Medical Care.” Mankiw’s column (and the longer treatment for his textbook [pdf]) is basically a restatement of the issues raised by Arrow over a half century ago.

According to Arrow, healthcare is characterized by a set of “special features,” all of which stem from the “prevalence of uncertainty.” These include the following:

  • an irregular, unpredictable demand for medical care
  • an element of trust in the relationship between patient and provider
  • considerable uncertainty as to the quality of the healthcare provided as well as asymmetry of knowledge concerning that quality
  • a restricted supply (e.g., because of licensing)
  • a combination of price discrimination (e.g., between the insured and uninsured) and price-fixing

In consequence, the healthcare industry cannot be expected to operate along the lines of, or to deliver the same results as, the canonical neoclassical model of perfect competition.

Thus, Arrow concludes,

It is the general social consensus, clearly, that the laissez-faire solution for medicine is intolerable. . .

The logic and limitations of ideal competitive behavior under uncertainty force us to recognize the incomplete description of reality supplied by the impersonal price system.

Neither Arrow nor Mankiw suggests what the alternative is. But it’s clear that, from the perspective of mainstream economics, healthcare cannot be shoehorned into the neoclassical model of perfect competition they use to analyze all other commodities and markets. What we can say is their theory of the economics of healthcare leaves open the possibility of considerable extra-market intervention and regulation.

Healthcare is where the utopianism of neoclassical economics fails.

But then we can ask, where does that utopianism not fail? Why should it hold any better when it comes to other capitalist commodities, such as labor power, money, and land? And, if it does not, then neither the modes of analysis nor the policy conclusions that are central to mainstream economics retain any validity.

In my opinion, that’s why the issue of utopia and healthcare is so important.

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Lots of folks have been asking me about the significance of the so-called Nobel Prize in economics that was awarded yesterday to Richard Thaler.

They’re interested because they’ve read or heard about the large catalog of exceptions to the usual neoclassical rule of rational decision-making that has been compiled by Thaler and other behavioral economists.

One of my favorites is the “ultimatum game,” in which a player proposes an allocation of an endowment (say $5) and the second player can accept or reject the proposal. If the proposal is accepted, both players get paid according to the proposal; if the proposal is rejected, both players get nothing. What Thaler and his coauthors found is that most of the second players would reject proposals that would give them less than 25 percent of the endowment—even though, rationally, they’d be better off with even one penny in the initial offer. In other words, many individuals are willing to pay a cost (i.e., get nothing) in order to punish individuals who make an “unfair” proposal to them. Such a notion of fairness is anathema to the kind of self-interested, rational decision-making that is central to neoclassical economic theory.

Other exceptions include the “endowment effect” (for the tendency of individuals to value items more just because they own them), the theory of “mental accounting” (according to which individuals can overcome cognitive limitations by simplifying the economic environment in systematic ways, such as using separate funds for different household expenditures), the planner-doer model (in which individuals are both myopic doers for short-term decisions and farsighted planners for decisions that have long-run implications), and so on—all of which have implications for a wide variety of economic behavior and institutions, from consumption to financial markets.

So, what is the significance of Thaler’s approach to economics?

As I see it, there are three stories that can be told about behavioral economics. The first one is the official story, as related by the Nobel committee, which starts from the proposition that “economics involves understanding human behaviour in economic decision-making situations and in markets.” But, since “people are complicated beings,” and even though the neoclassical model “provided solutions to important and complicated economic problems,” Thaler’s work (alone and with his coauthors) has contributed to expanding and refining economic analysis by considering psychological traits that systematically influence economic decisions—thus creating a “a flourishing area of research” and providing “economists with a richer set of analytical and experimental tools for understanding and predicting human behavior.”

A second story is provided by Yahya Madra (in Contending Economic Theories, with Richard Wolff and Stephen Resnick): behavioral economics forms part of what he calls “late neoclassical theory” that both poses critical questions about neoclassical homo economicus and threatens to overrun the limits of neoclassical theory by offering “a completely new vision of how to specify the economic behavior of individuals.” Thus,

Based on its psychological explorations, behavioral economics confronts a choice: will it remain a research field that merely catalogs various shortcomings of the traditional neoclassical model and account of human behavior or will it break from neoclassical theory to formulate a new theory of human behavior?

A third story stems from a recognition that behavioral economics challenges some aspects of neoclassical economics—by pointing out many of the ways individuals are guided by forms of decisionmaking that violate the rule of self-interested rationality presumed by traditional neoclassical economists—and yet remains within the strictures of neoclassical economics—by focusing on individual behavior and using rational decision-making as the goal.

Thus, Thaler’s work and the work of most behavioral economists focuses on the limits to individual rationality and not on the perverse incentives and structures that plague contemporary capitalism. There’s no mention of the ways wealthy individuals and large corporations, precisely because of their high incomes and profits, are able to make individually rational decisions that—as in the crash of 2007-08—have negative social ramifications for everyone else. Nor is there a discussion of the different kinds of rationalities that are implicit in different ways of organizing the economy. As I wrote back in 2011, “is there a difference between how capitalists (who appropriate the surplus for doing nothing) and workers (who actually produce the surplus) might decide to distribute the surplus to others?”

Moreover, while behavioral economics have compiled a long list of exceptions to neoclassical rationality, they still use the neoclassical ideal as the horizon of their work. This can be seen in what is probably the best known of Thaler’s writings (with coauthor Cass Sunstein), the idea of “libertarian paternalism.” According to this view, “beneficial changes in behavior can be achieved by minimally invasive policies that nudge people to make the right decisions for themselves.” Thus, for example, Thaler proposed changing the default option in defined-contribution pension plans from having to actively sign up for the plan (which leads to suboptimal outcomes) to automatically joining the plan at some default savings rate and in some default investment strategy (which approximates rational decision-making).

The problem is, there’s no discussion of the idea that workers would benefit from an alternative to defined-contribution plans—whether defined-benefit plans or the expansion of Social Security. It’s all about taking the institutional structure as given and “nudging” individuals, via the appropriate design of mechanisms, to make the kinds of rational decisions that are presumed within neoclassical economics.

Paraphrasing that nineteenth-century critic of political economy, we can say that economic decision-making appears, at first sight, a very trivial thing, and easily understood. Its analysis shows that it is, in reality, a very queer thing, abounding in metaphysical subtleties and theological niceties. We might credit Thaler and other behavioral economists, then, for having taken a first step in challenging the traditional neoclassical account of rational decision-making. But they stop far short of examining the perverse incentives that are built into the current economic system or the alternative rationalities that could serve as the basis for a different way of organizing economic and social life. And, in terms of economic theory, they appear not to be able to imagine another way of thinking about the economy, as a process without an individual subject.

However, taking any of those steps would never be recognized with a Nobel Prize in economics.

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Almost very time MFA hears a mainstream economist speak—on topics ranging from the danger of raising the minimum wage to how we all benefit from free trade and globalization—she responds, “Where did they get their degree, from a Cracker Jack box?”

No doubt, she’d react in the same manner if she listened to the members of the closing panel at the 2017 Lindau Meeting on Economic Sciences, who were asked to answer the following question: what could and should we do about inequality?

It’s a terrific question, given the obscene—and still rising—levels of inequality that characterize contemporary capitalism, in the United States and around the world. But those who take the time to watch the video (available here) just aren’t going to learn much about either the causes of inequality or what we can do about it.

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The panel consisted of three winners of the so-called Nobel Prize in Economic SciencesDaniel L. McFadden (2000), James J. Heckman (2000), and Christopher A. Pissarides (2000)—and one “young economist,” Rong Hai.

Individually and together, the panelists simply don’t have anything interesting or insightful to say about inequality.

It’s true, none of the men received their Nobel Prizes for research on inequality, although Hai is currently doing research on inequality (e.g., in relation to credit constraints and tax policy). That itself is a comment on how little inequality has figured as an important concern within mainstream economics. And, given the venue, they’re all mainstream economists. Because of that, there’s little they can say—and a great deal they simply can’t say—about inequality.

Their comments (only some of which were actually prepared) range from the obvious—the issue of poverty is different from that of inequality—to the all-too-frequent sidestep—inequality is caused by globalization and technology.

But they don’t have anything to say about contemporary economic and social institutions, especially those of capitalism, or about history. They don’t discuss in any detail the changes in recent decades that have led to the current obscene levels of inequality or, for that matter, the relationship between the factor distribution of income (e.g, between labor and capital) and the size distribution of income (e.g., the growing gap between the 1 percent and everyone else).

Their concern about and knowledge of the causes and consequences of inequality are, at least to judge from their presentations in this panel, stupefyingly limited.

Maybe MFA is right: they did get their degrees from Cracker Jack boxes.

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The election and administration of Donald Trump have focused attention on the many symbols of racism and white supremacy that still exist across the United States. They’re a national disgrace. Fortunately, we’re also witnessing renewed efforts to dethrone Confederate monuments and other such symbols as part of a long-overdue campaign to rethink Americans’ history as a nation.

In economics, the problem is not monuments but the discipline itself. It’s the most disgraceful discipline in the academy. Therefore, we should dethrone ourselves.

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In the United States, thanks to the work of the Southern Poverty Law Center, we know there are over 700 monuments and statues to the Confederacy, as well as scores of public schools, counties and cities, and military bases named for Confederate leaders and icons.

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We also know those symbols do not represent any kind of shared heritage but, instead, conceal the real history of the Confederate States of America and the seven decades of Jim Crow segregation and oppression that followed the Reconstruction era. In fact, most of them were dedicated not immediately after the Civil War, but during two key periods in U.S. history:

The first began around 1900, amid the period in which states were enacting Jim Crow laws to disenfranchise the newly freed African Americans and re-segregate society. This spike lasted well into the 1920s, a period that saw a dramatic resurgence of the Ku Klux Klan, which had been born in the immediate aftermath of the Civil War.

The second spike began in the early 1950s and lasted through the 1960s, as the civil rights movement led to a backlash among segregationists. These two periods also coincided with the 50th and 100th anniversaries of the Civil War.

The problem, of course, is those statues have stayed up for so long because, like so many other features of our everyday landscape, they became so familiar that Americans hardly even noticed they were there.

It should come as no surprise, then, that a majority of Americans (62 percent) believe statues honoring leaders of the Confederacy should remain. However, a similar majority (55 percent) said they disapproved of the Trump’s response to the deadly violence that occurred at a white supremacist rally in Charlottesville. As a result, I expect Americans will be engaged in a new conversation about their history—especially the most disgraceful episodes of slavery, white supremacy, and racism—and what those symbols represent today.

The discipline of economics has a similar problem—not of statues but of sexism and hostility to women. It’s been so much a feature of our everyday academic landscape that economists hardly even noticed it was there.

They didn’t notice until reports surfaced—in the New York Times and the Washington Post—concerning Alice Wu’s senior thesis in economics at the University of California-Berkeley. Wu analyzed over a million posts on the anonymous online message board, Economics Job Market Rumors, to analyze how economists talk about women in the profession.

According to Wu,

Gender stereotyping can take a subtle or implicit form that makes it difficult to measure and analyze in economics. In addition, people tend not to reveal their true beliefs about gender if they care about political and social correctness in public. The anonymity on the Economics Job Market Rumors forum, however, removes such barriers, and thus provides a natural setting to study the existence and extent of gender stereotyping in this academic community online.

And the results of her analysis? The 30 words most associated with women were (in order, from top to bottom): hotter, lesbian, bb (Internet terminology for “baby”), sexism, tits, anal, marrying, feminazi, slut, hot, vagina, boobs, pregnant, pregnancy, cute, marry, levy, gorgeous, horny, crush, beautiful, secretary, dump, shopping, date, nonprofit, intentions, sexy, dated, and prostitute.

In contrast, the terms most associated with men included mathematician, pricing, adviser, textbook, motivated, Wharton, goals, Nobel, and philosopher. Indeed, the only derogatory terms in the list were bully and homo.

In my experience, that’s a pretty accurate description of how women and men are unequally seen, treated, and talked about in economics—and that’s been true for much of the history of the discipline.*

But, of course, that’s not the only reason economics is the most bankrupt, disgraceful discipline in the entire academy. It has long shunned and punished economists who endeavor to use theories and methods that fall outside mainstream economics—denying jobs, research funding, publication outlets, and honorifics to their “colleagues” who have the temerity to teach and do research utilizing other discourses and paradigms, from Marxism to feminism. 

Even the attempt to convince economists to adopt a code of ethics—like those in many other disciplines, from anthropology to medicine—was treated with disdain.

Sure, there’s a Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. And, in the United States, both a Council of Economic Advisers and a National Economic Council—but no White House Council of Social Advisers.

Economics may have national and international prominence. But it’s time we give up the hand-wringing and admit there is no standard of decency or intelligence (with the possible exception of mathematics) that economists don’t fail on.

We are, in short, a collective disgrace. That’s why we should dethrone ourselves.

 

*A history that includes Joan Robinson, who should have won the Nobel Prize in Economics but didn’t (because, of course, she was a non-neoclassical, female economist) and can’t (because she’s dead).

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Last year, as I reported the other day, I published over 800 new posts.

I’ve never done this before. However, I decided to look back over the year and choose one post for each month of 2016:

January—Liberal ideology

February—Who are the capitalists?

March—Yea, they’re angry!

April—Life among the liberal econ

May—Letting capitalism off the hook

June—Globalization, inequality, and imperialism

July—Trump and the Prosperity Gospel

August—The Mandibles and dystopian finance fiction

September—What about the white working-class?

October—Nobel economics—or why does capital hire labor?

November—Condition of the working-class in the United States

December—China syndrome

Enjoy!