Via several blogs where it was mentioned (I saw it on NewApps and Feminist Philosophers), a link to a new blog, called Occupy Philosophy. I’m no longer sure what the word ‘Occupy’ is supposed to mean when we are not only using it in connection with seats of capitalist power (as in ‘Occupy Wall Street’) but also in connection with seats of systematic/critical reflection (‘Occupy Philosophy’). But let’s not spend our energy on that quibble, but rather applaud efforts to involve professional philosophers (and other academics) in contributing to the discussion of the issues that the Occupyers are trying to put on the political agenda.
Two related things perhaps worth mentioning.
First, in the Netherlands a very interesting initiative started a few weeks ago (independent of Occupy Wall Street, but obviously not independent of the same global problems in the financial sector): the Sustainable Finance Lab. It’s an initiative by an eclectic group of academics, mostly economists (some more mainstream, some more heterodox), and one small ‘green’ bank (Triodos), to bring together people interests in debating what the real problems are with the financial sector and what needs to be changed. So far there have been 2 meetings (last Monday and the Monday before), which were 4 times oversubscribed according to the organizers. I’ve attended both meetings and it’s been very, very interesting – in fact, on issues of economics I haven’t seen anything as interesting so close to home for a long time, and that’s probably because people who normally don’t speak to each other are sitting in the same room and sharing their views. Bankers, academics, students, ex-investment bankers, journalists — they all share their views in a respectful atmosphere, but it’s clear they do not quite have the same perception of how urgent change is needed, and indeed what type of change is needed, or what the causes of the problems are. I’ll try to remember posting something about the Sustainable Finance Lab after the first series of meetings is over (end of this year), but in the meantime, for those of you who understand Dutch, you can read my analysis (criticism) of the first two meetings here. I’d be interested to hear if any similar initiatives have been taken in other countries.
Second, both the debates at the Sustainable Finance Lab (where some of the self-criticism by some economists gives me a strong, but also somewhat ironic, déjà -vu feeling), and the article ‘Economics has met the enemy and it is economics‘, published in The Globe and Mail last weekend, remind me so much of the debate we had as economics grad students on the relation of economics with the economy and the rest of the world. If you think there is something deeply wrong with the economic system (or at least some aspects/sectors of it), you just cannot not pose the question whether there is also something wrong with the discipline that studies, influences, shapes and to some extent legitimizes that system (not necessarily in that order). Whole generations of economists, including me, have been educated with the clear message (dogma, if you want): There Is No Alternative. At best, you can tinker at little at the margins. So I couldn’t help wondering: now that the people are on the streets, will a new generation of young economists, who haven’t given up on the discipline yet, stand up and demand it to change so as to make sure it serves the people’s true needs, all people equally, including those who have yet to be born? Will they organize ‘Occupy Economics’?
{ 62 comments }
John Quiggin 10.17.11 at 9:52 am
One problem I see with a lot of attempts at challenging economics, notably including PAE, is the attack on mathematics, and the suggestion that we should rely primarily on verbal methods. Economics deals to a very large extent with quantitative variables, a point that is obvious with respect to “We are the 99 per cent”.
That’s not to defend a lot of what’s done in mathematical economics, but a variant of Sturgeon’s Law/Revelation applies here – 90 per cent [in bad moods I’d go for 99] of mathematical econ is crap, but then 90 per cent of everything is crap.
The response (equally applicable to verbal theorising) I’d favor is:
(a) Keep a focus on the implications of work for the actual issues facing the economy, rather than on internally-generated theoretical puzzles
(b) Pay attention to evidence, even while accepting that no one piece of evidence can be decisive
afinetheorem 10.17.11 at 10:00 am
I find the G&M article rather ridiculous. The “post-autistic” types are utterly and completely different from behavioralists, or those interested in agent-based models, or whatever: indeed, the mathematics is often more difficult in those fields. And it’s not as if economics is completely ignoring anything other than pure homo economicus. Look at the contents of the new issue of the American Economic Review, for example. There’s purely empirical data analysis, atheoretical randomized trials, behavioral models (search and learning, for example), frictions (sticky prices, credit constraints, information). Philosophically, there’s nothing strange at all about a field having a paradigmatic foundation, then exploring deviations from that paradigm with a variety of theoretical and empirical methods.
And how strange the motivation of the article! Both Tom Sargent and Chris Sims refuse to make grand proclamations about what their theory has to tell us about the crisis, because they both understand that theory is merely an argument by analogy and not a dogma nor an instruction guide. Yet the journalist takes these comments as the starting point to investigate why economists are so dogmatic and so ridiculously take their models to be equivalent to the real world. Competent economists agree with that critique.
One last thing: both within economics (on the worldwide level), and within social science more broadly, there are many, many researchers from many, many different schools of thought who, ex-post, would like to have described why high housing prices would lead through a string of intermediation to a major worldwide recession. Mainstream neoclassical theory did not do a particularly good job of dealing with the issue of systemic risk, though I think it did a perfectly fine job of dealing with non self-interested firms (the principal-agent models of individual behavior within a firm: brokers get theirs and damn the company), it did a perfectly fine job with what policymakers should do to get demand back (though policymakers by and large haven’t cared), and it did a perfectly fine job predicting this Euro crisis from the very beginning (see Blundell’s work on optimal currency areas). Are there other schools which have proved more useful to policymakers? Did nonmathematical post-autistic economists or some other heterodox school nail the systemic risk issue in a way that Kiyotaki didn’t, or nail the problem of bank runs in the shadow banking sector in a better way than Doug Diamond did? Economists are not clairvoyants.
Tim Wilkinson 10.17.11 at 11:57 am
afinetheorem: Yes, every competent economist agrees that these criticisms are valid – the problem is that this kind of acknowledgment by mainstream theorists is largely inert, kept in the bottom drawer for production on demand, and out away and forgotten once brandished. And that is precisely because of the field’s having a paradigmatic foundation, then exploring deviations from that paradigm. Those who explore the deviations provide cover for those who press ahead regardless, because the core paradigm of revealed preference, Pareto-efficiency, competitive markets and general equilibrium is not amenable to any substantial injection of reality. (The really difficult issues are disposed of by fiat – perfect information/processing power; rational self-interest, etc – before the maths can even get started at all.)
The paradigm itself is in need of shifting, and I think that is the real relevance of discussion about mathematical methods. It’s not that there’s anything wrong with using maths, it’s that the maths is being applied to a conceptual framework that’s inadequate. And given that, concentrating on models and equations is just a diversion from the real work that needs to be done in rethinking the enterprise. That work is going to be done in the essentially semantic medium of words, rather than essentially syntactic mathematical symbolism.
Also, FWIW, I thought the G&M article a very well-done popular overview. It mentioned the amusing interviews in Inside Job (which I’ve linked to before) and did a pretty good job of explaining some key unrealities of neoclassical orthodoxy.
I’m not sure that its quote from Joseph Stiglitz: “we need better theories of persistent deviations from rationality.†represents a sufficiently radical approach to the kind of work that needs to be done, but that’s more than compensated for by the article’s inclusion of the splendid fact, new to me, that the Economics ‘Nobel Prize’ is fake. It’s actually a ‘Sveriges Riksbank Prize’ paid for by Sweden’s central bank and artfully arranged to look like a Nobel.
Which is perfectly, exquisitely apt.
Tim Wilkinson 10.17.11 at 12:02 pm
‘out away’ -> ‘put away’
nostalgebraist 10.17.11 at 1:14 pm
Quick, simplistic take: It seems to me that it’s a bit difficult to articulate in a snappy way what’s wrong with (current) mathematical economics, since the problem isn’t that it’s “too mathematical” but that it strives to be very “mathematical” while clinging to a peculiar sense of what this means. For instance, as Deirdre McCloskey has noted, the econ department seems to have gotten its notion of mathematical rigor from the the math department rather than the physics or engineering departments: it is concerned with exact solutions, theorems that are as general as possible, etc., rather than with optimizing our predictive skill, with the idea that exactness and generality are just what it means to be a “rigorous” mathematical discipline (which is indeed true in pure math). In my admittedly limited experience, economists seem oddly uninterested in asymptotics, ensemble prediction, numerical tests to make sure a given term can be dropped from an equation, and other inexact methods that are bread and butter for other applied-mathematical types. They just want to toss out whatever effects would make their problem hard to solve (without even making a formal asymptotic argument). Similarly sloppy “let’s just ignore this thing ’cause it makes our life hard” reasoning does happen in physics and applied math, but in those cases it’s either shorthand for an obvious regular perturbation approach, or minimally harmful because physical scientists have such solid theories and such good contact with data that it is not too hard to confirm whether this or that approximation works simply by looking at the real system. (Neither of those mitigating factors seem to be at work in econ.)
So basically the problem is that econ cares too much about being “mathematical” in its odd sense of the word, but not enough about being “mathematical” in the sense of being similar to other mathematical sciences. But that’s not a very catchy sound bite.
mpowell 10.17.11 at 1:22 pm
I’d agree with Tim here. My issue with neoclassical economics is that this recession wasn’t triggered by housing prices -> it was triggered in the US by stagnant real wages that were temporarily hidden by housing prices. And, to me, this is the result of 30 years of pursuing Reaganomics. And yeah, neoclassical economics did nothing to predict this and neither did the Keynesians because all they look at is macroeconomic aggregates and do not really attempt medium or long term forecasts. But there were plenty of people looking at this issue and shouting about in the early 2000s at least. Plenty of people didn’t like Reaganomics on ethical grounds, but people had also noted that *it wasn’t working* before the crash hit.
John Quiggin 10.17.11 at 1:54 pm
“neither did the Keynesians because all they look at is macroeconomic aggregates and do not really attempt medium or long term forecasts”
This isn’t true, unless you define “Keynesians” to mean “Keynesian macro specialists”, in which case it is tautological. Lots of people who are clearly Keynesians (Krugman for example, and, for that matter, me) were making this point long before the crisis.
That said, it was much easier to observe the unsustainability of trends in the US economy in the early 2000s than to diagnose the precise nature of that unsustainability. In particular, I agree with Krugman that it’s far from clear that they system can’t survive with stagnant real wages, as long as the rich keep spending.
Neel Krishnaswami 10.17.11 at 2:09 pm
@John: I’m cuious in how you, personally, reconcile modern new Keynesianism with stuff like the Case-Shiller indices? Real estate is something like a third of national wealth in the US (and most developed countries, IIRC) and those indices show nothing remotely like an efficient market — there’s absolutely huge momentum in real estate prices, which rise and fall very smoothly. This is fatal to real business cycle theory, of course. but even for a Keynesian analysis it poses pretty severe problems, since it casts a lot of doubt on monetary explanations of booms and recessions.
JW Mason 10.17.11 at 2:24 pm
One problem I see with a lot of attempts at challenging economics, notably including PAE, is the attack on mathematics, and the suggestion that we should rely primarily on verbal methods.
That’s Keynes, of course. And like Keynes, I think we can and should criticize excessive use of mathematics in economics (it really is excessive!) without having to give up quantitative methods entirely.
Colin Danby 10.17.11 at 3:02 pm
John, I haven’t read the whole PAE corpus by any means, but what I remember, and a quick scan of http://www.paecon.net/PAEmovementindex1.htm does not appear to support your claim about “the attack on mathematics, and the suggestion that we should rely primarily on verbal methods.” Can you source this?
tomslee 10.17.11 at 3:06 pm
Colin Danby: If you look at the quotations in the left column I think the intent is clear enough. The first quotation is from Friedman: “economics has become increasingly an arcane branch of mathematics rather than dealing with real economic problems”.
Barry 10.17.11 at 3:07 pm
JQ: “That’s not to defend a lot of what’s done in mathematical economics, but a variant of Sturgeon’s Law/Revelation applies here – 90 per cent [in bad moods I’d go for 99] of mathematical econ is crap, but then 90 per cent of everything is crap.”
As has been pointed out by Krugman and others, the point here is that it’s not just hacks from AEI/CEI/Manhattan/Hoover/Hudson/George Marshall/Heritage/Goerge Mason/et al., but people who are elite economists. By now it’s clear that Chicago and Harvard are indifferent to utter hackdom.
Mark Kleiman put it nicely (I’m paraphrasing): when looking for advisors for a GOP president candidate, in most fields one should avoid elite departments. In economics, that candidate could get respectable experts from respectable departments to say whatever the GOP line was.
jtascensao 10.17.11 at 3:15 pm
There will be times when we’ll stop being economists, sociologists, philosophers or whatever we call it to become social scientists, working all together to better understand social problems. Sometimes we forget economics itself is no more than a social construct, a response to unfulfilled social needs. Markets are no more than institutional constructs, social responses to social problems and therefore are multidimensional phenomenons and must be analysed under multiple perspectives. Culture, historical path, gender relations, geography, endowments, family structures, informal institutions and social conventions, all these elements influence and shape the economy despite being ignored by mainstream economics. Economy tends to opt by mathematical one-size-fits-all approaches and analytic methods that are obviously unable to properly describe the reality; despite its general insignificance, mainstream economics (microeconomics I mean) are a useful tool as a sort of a lab where we can test hypothesis and relations in a closed ceteris-paribus environment. Unfortunately, reality is way deeper than that and it’s time for us to recognize how difficult this job is, to open economics and to shift towards greater interdisciplinarity despite the struggle to find common grounds of study and action. I pick institutions.
Face it, economy wouldn’t suck so bad if economists were doing good. Great article!
theweatherforecaster.wordpress.com
Greetings from Portugal,
jtascensao
John Quiggin 10.17.11 at 3:20 pm
Barry@12 I’m not seeing the link between my comment and your response. FWIW, I agree with the point made in the response.
Evil is evil 10.17.11 at 3:20 pm
There is an amusing story floating around about some genetic specialists in virology. They could not figure out some twist in why something happened, so they designed an internet game and released it. Three weeks later, the gamers had pretty well solved the problem.
Now what occurred to me was: Why can’t an economic model called Total Capitalism be made into a free on line game and then find out what theories of economics are totally invalid? If there is a theory then rules can be written that incorporate it.
Gamers do have a use. People just don’t think of them as a resource (except the flying bomb military and CIA.)
I suspect that a game like that would immediately show how gambling on markets really works. It would not resemble the steaming pile of crap that is “economics.”
politicalfootball 10.17.11 at 3:29 pm
I agree with Barry. “Occupy Economics,” if it happens, has to address the profession’s corruption, not its mathematics. When influential practitioners develop a desire to come up with the right answer, they’ll come up with the right tools.
Patrick S. O'Donnell 10.17.11 at 3:35 pm
@ 5 “as Deirdre McCloskey has noted, the econ department seems to have gotten its notion of mathematical rigor from the math department rather than the physics or engineering departments: it is concerned with exact solutions, theorems that are as general as possible, etc., rather than with optimizing our predictive skill, with the idea that exactness and generality are just what it means to be a ‘rigorous’ mathematical discipline (which is indeed true in pure math).â€
This is not quite right about McCloskey’s complaints about her profession. First, she believes economics as generally practiced has revealed a debilitating anxiety over its status as a “Science,†often unconsciously relying on a crudely reductionist and positivist conception of same. That particular conception of science believes there to be little if anything of true scientific value under the rubric of “social science,†it MUST, in other words, enumerate, test hypotheses, experiment…. The result is the exclusion of political thought, of anthropology, history, indeed, most social sciences, and McCloskey herself is an historian of economics. She is open to various methods being employed in the discipline, including “rhetorical†analysis and interpretive tools in a manner that break down artificial and unjustifiable or hard and fast boundaries between the humanities and the sciences, natural and social. Thus, “tough mathematization†employed as a rhetorical method to prop up the putative “hardness†of economics as a science is the heart of the problem. In short, she is for an “interpretive and humanistic economics†that finds a more modest but no less necessary role for mathematics in the discipline (‘It would of course be idiotic to object to the mere existence of mathematics in economics.’). She is NOT, therefore, aiming to prod her colleagues into “optimizing our predictive skill,†in her words, “If economic is a good imitation of (some high-status branch) of physics, a capital-S Science in the definition offered by philosophers around 1955, the it should predict,†but a “predictable future is a freedomless nightmare,†and, after Robert Lucas, “a predictable economy is not one in which government policy can work.â€
Economists, as “specialists,†need to be open to cognitive and disciplinary trading and raiding, sans the belief that they are in possession of a methodology that is emblematic of “hard†or pure science, of a kind that, say, holds out physics as a exemplum: “Learning entails less sneering by physicists at chemists or be economists at sociologists or by mathematicians at statisticians.†The recalcitrant problem of the profession is therefore “scientism,†not that it “seems to have gotten its notion of mathematical rigor from the math department rather than the physics or engineering departments,†indeed, McCloskey thinks part of the problem is that economists have gotten their notion of mathematical rigor from a (false) perception of how mathematics is practiced among physicists. Thus “boilerplate†scientistic rhetoric “hides a five-cent thought in a five-dollar word,†in this case, through the rhetoric of mathematic formalism. The problem, again, is evidence of an inferiority complex vis-à -vis physicists, whom economists admire and thus use as an implicit standard for judging their rhetorical productions. So, while the “math department character†of economics IS a problem, the solution does NOT lie in retrieving a notion of mathematical rigor from physics (or even engineering, for that matter). The scientism is a result of the fact that “Economists think that science involves axiomatic proofs of theorems and then econometric tests of the QED (quod erat demonstrandum, not quantum electrodynamics). So, in effect, economists “have adopted the intellectual values of the math department—not the values of the departments of physics or electrical engineering or biochemistry they admire from afar.†Qualitative theorems, for example, “do not, strictly speaking, relate to anything an economist would actually want to know.†It does not follow that economists should therefore adopt the values “of the departments of physics or electrical engineering or biochemistry.†In sum, “The way the mathematical rhetoric has been transformed into economic rhetoric has been to define the economic problem as dealing with a certain kind of (easily manipulable) mathematics and then to run the field as though math-department questions were in fact important for the science. It is a search under the lamppost because the light there is so good, as the drunk explained after losing his keys in the dark.â€
Pure mathematics does the profession more harm than good, the mortal sins neither quantification or mathematics as such. As part of a more self-conscious concern with the rhetoric of economics, economists should be methodologically tolerant if not pluralist, and this entails, minimally, facing their appalling “institutional†and “historical†ignorance (something well under way in some quarters of the profession) as well as overcoming their “cultural barbarism†that follows from a “philosophical naïveté†(knowing little or nothing, for instance, of linguistics, philosophy, and literary criticism), and reflects subscription to a “high-school version†of positivism and philosophy of science. And this is not enough! Economists need also to transcend their adherence to a “high school version†of ethical philosophy and avoid temptations “to arrogance in social engineering.†(McCloskey does point out that some of the above ‘sins’ are not the monopoly of his profession.) [For details, see her Knowledge and Persuasion in Economics (1994), and The Secret Sins of Economics (2002)]
marcel 10.17.11 at 3:37 pm
One problem with the mathematization of econ is that those pushing it the most pick and choose the conclusions to trumpet. One hallmark of modern macro is the application of the Arrow-Debreu model to analysis of economic aggregates; this is a major part of what was once upon a time called the rational expectations revolution. In the course of carrying forward this sort of analysis through, everything that we know about both aggregation and in particular the representative agent have been ignored.
1) In the one case, aggregation, the aggregate is not stable, i.e., what it represents, is not stable over time if things like prices or production technologies change.
2) The rep-agent is constructed as a weighted average of the underlying individuals, where the weights (known, IIRC, as Negishi weights), so far as we can tell, are proportional to the wealth of each of the individuals. If there is any reason to believe that maximizing the utility of this construct is something to aim for, I am not aware that anyone has articulated it.
3) As a final example (and I imagine that there are plenty of others), Scarf’s result from a half century ago that without unreasonable assumptions, we cannot get from Arrow-Debreu equilibrium to demand curves that any economist would recognize as well behaved suggests that the AD result is more a statement of what is unlikely in the real world than as a useful basis for analysis.
One could make at least as strong a case that economic reasoning needs to rely more consistently on mathematical results as that it relies too much on mathematics. It is a tool that can be used to clarify or, as too often in economics (likely because of what is at stake), to obscure.
Colin Danby 10.17.11 at 3:50 pm
No, tomslee @11, it’s not “clear enough.”
The problem is precisely that a range of critiques of the role of mathematical tools, conceptualizations etc. in economics get conflated by people like John into an “attack on mathematics.” Since an “attack on mathematics” would be deeply idiotic, this is a serious charge.
I’m calling bullshit on this kind of argument by insinuation and cheap generalization.
nostalgebraist 10.17.11 at 3:56 pm
Patrick @16: I’m a little bit confused by your argument. When I wrote my earlier comment I was (as I think you inferred) thinking of The Secret Sins of Economics, specifically how McCloskey talks about how economics has gotten its standards of rigor from pure math rather than from mathematical science. Obviously, that’s not McCloskey’s only charge against the discipline, but it does seem to me the McCloskey would like economics to adopt a more physics-like methodology in certain senses. Otherwise she wouldn’t treat it as a problem that econ’s sense of rigor comes from pure math. This is not to say that they should try to be like physics in every way, but I think you, I, and McCloskey all understand that; the point is that in certain particular ways, econ has adopted standards of what it means to be “mathematical” or “scientific” that are not justifiable, and that (as a first approximation, along with many other changes that McCloskey suggests and I support, like increased emphasis on history), econ might do well to look at the standards of rigor that are used in physics and engineering. Do you disagree? And do you think this isn’t what McCloskey is saying (well, one of the many things she is saying)?
The role of “physics” in economic rhetoric is similar to the role of “mathematical rigor,” and makes these issues difficult to talk about in a similar way. In a way it sounds as though I am recommending that economists slavishly imitate physics more than they already do, which invites the complaint that economists already have way too much physics envy. But the problem is that I think they imitate physics in the wrong way: they strive toward the creation of an exact science with simple, universal laws (which I think is not feasible for a social science), while ignoring the attitude toward approximate results, quantitative predictions, etc. in physics, which would probably be a good thing for them to adopt (mutatis mutandis, though, and in this case the mutandis may be pretty big). That is, economists should have less physics envy, if anything, but the physics envy they do have should be better physics envy.
AcademicLurker 10.17.11 at 4:20 pm
@1
That’s not to defend a lot of what’s done in mathematical economics, but a variant of Sturgeon’s Law/Revelation applies here – 90 per cent [in bad moods I’d go for 99] of mathematical econ is crap, but then 90 per cent of everything is crap.
I think this is letting economics too easily off the hook with “well, everyone does it” excuse.
In the physical/biological sciences, you could plausibly claim that 90% of published results are of immediate interest only to those working in some narrow subfield, but that’s different from “90% of published results are crap”. It’s more like “90% of published results are boring”.
“Molecule X up-regulates signal transduction protein Y” may not be a result to set the world on fire, but it is one additional small drop of knowledge added to the general store*, and might prove important if protein Y turns out to be implicated in disease Z.
That’s a far cry from economics, where so much of what’s done appears to run a gamut from “just plain wrong” to “not even wrong”.
* and no, contrary to what overzealous science haters may tell you, 90% of published papers don’t turn out to be fraudulent.
JW Mason 10.17.11 at 4:23 pm
Colin @18-
Your’re right, it is not true that there is a conflict between the mainstream (pro-mathematics) and left wing critics like PAE (anti-mathematics). The debate is about what specific forms of mathematical formalization are helpful, and which are not.
So my question for John Q. would be, is there any legitimate critique of the f mathematical methods used by mainstream economics?
Remember, it wasn’t someone on the left fringe who recently said that there is “no use for the vast literature devoted to providing sound micro-foundations to macroeconomics.” It was Larry Summers. And I know several economists associated with top-tier universities who feel that models representing various outcomes as the result of rational optimizing by individuals are entirely useless. Such models make up a very large proportion of the math in economics. Similarly, Deirdre McCloskey’s pamphlet on “the secret sins of economists,” which a couple people mentioned upthread, makes a very particular critique of econometrics as normally practiced, that it focuses almost exclusively on qualitative results.
So the question is, are these valid critiques? Is it possible there’s something systematically wrong with the ways that mainstream economics makes use of math?
In any case, Sturgeon’s law is unhelpful here (and wrong.) In effect, the law says that you can’t criticize genres/fields/etc., only individual works. But sometimes you should criticize fields — not all crap is distributed evenly across them.
Bruce Wilder 10.17.11 at 4:28 pm
I can see how one might get from the insights of Arrow-Debreu to, say, Oliver Williamson; I do not see how a truly rational person could see the “rational expectations” of Robert Lucas as anything, but a deliberate wrong turn into ignorance. Of course, the latter promises the joys of “hard math”, and learning the hard math in place of any economics has become a tool for the socialization of graduate students, but, really, what could drive this insanity, if not corruption?
John Quiggin 10.17.11 at 4:35 pm
@JW As with Barry it seems to me as if we are talking about unrelated issues (in my math mode, I’d say orthogonal). There’s no relationship at all between the validity of the case for micro-foundations and the usefulness or otherwise of math. Both sides of the micro-foundations case can be (and are) argued in every mode from purely verbal to highly mathematical.
The original rational expectations paper by Muth is centred on a verbal critique of mathematical (cobweb) models of dynamic price formation (I think he was right, but that Lucas was wrong in trying the same critique in macro). Similarly, you can tell the whole rational expectations/Ricardian equivalence story without ever using an equation – Ricardo did so after all. And you can do a Robinson Crusoe story of the economy with almost zero maths – every intro textbook does this.
On the whole, as was said above, the correlation is in the opposite direction. Behavioral econ requires more math than expected utility maximization – I know since I do this for a living.
You can prove the existence of general equilibrium with a bit of handwaving, and the fundamental welfare theorems then need hardly any math at all. By contrast, the Debreu-Mantel-Sonnenschein result is deep and surprising, as is the (more relevant IMHO analysis of the minimal set of markets needed to sustain the optimality of GE).
marcel 10.17.11 at 4:35 pm
Bruce Wilder asked:
Of course, the latter promises the joys of “hard mathâ€, and learning the hard math in place of any economics has become a tool for the socialization of graduate students, but, really, what could drive this insanity, if not corruption?
A positive feedback loop based on personality types attracted to the field?
See John Kay’s comments, especially:
Lucas and those who follow him were plainly engaged in a very different exercise, as the philosopher Nancy Cartwright has explained.[4] The distinguishing characteristic of their approach is that the list of unrealistic simplifying assumptions is extremely long. Lucas was explicit about his objective[5] – ‘the construction of a mechanical artificial world populated by interacting robots that economics typically studies’. An economic theory, he explains, is something that ‘can be put on a computer and run’. Lucas has called structures like these ‘analogue economies’, because they are, in a sense, complete economic systems. They loosely resemble the world, but a world so pared down that everything about them is either known, or can be made up. Such models are akin to Tolkien’s Middle Earth, or a computer game like Grand Theft Auto.
The knowledge that every problem has an answer, even and perhaps especially if that answer may be difficult to find, meets a deeply felt human need. For that reason, many people become obsessive about artificial worlds, such as computer games, in which they can see the connection between actions and outcomes. Many economists who pursue these approaches are similarly asocial. It is probably no accident that economics is by far the most male of the social sciences.
Not to say that corruption does not play a major role, but I think there are also internal factors.
Bruce Wilder 10.17.11 at 4:44 pm
AcademicLurker@21
The vast majority of research studies produced in biological fields like zoology or botany are field studies of some very specific ecology or species, but the Darwinian theory which is applied in these studies lends itself to the conceptual categorization of results. There’s no equivalent in economics, because the core paradigm is so resistant to fact.
That resistance to fact is a puzzle. Whether that puzzle is better considered as ideological, sociological, logical, methodological, or moral remains an open question, but the resistance remains a fact, with serious effects on human welfare.
Colin Danby 10.17.11 at 4:48 pm
Just a word of background, getting back to part two of Ingrid’s post.
I remember hanging out with a group of grad students at an conference of the Association for Heterodox Economics shortly after PAE was founded. They were mostly in UK and French grad programs, and were frustrated by the narrowness of what they were being taught and examined on.
But they had discovered that whenever they spoke up, in their home departments or in other mainstream settings, they were accused of being hostile to mathematics. And this accusation shut them down, even though it was quite false.
(To any non-economist readers still reading this thread: you have to spend time in econ circles to appreciate the amount of machismo that is bound up with mathematical prowess. The most wounding dismissal of a fellow economist is to cast doubt on their math. Grad students learn this quickly, because the most difficult hurdles they have to clear in their education are mathematical, so the mere insinuation that they aren’t, you know, all that good at math is potentially damaging.)
So John’s language about “attack on mathematics” is not innocent. It’s a defensive reflex to avoid dealing substantively with critique.
It’s worth reaffirming, to be clear, that there is no tight mapping between politics and orthodox/heterodox, and a lot of politically-valuable work can be done within orthodox econ, as John’s output demonstrates. But it is hard to imagine the kind of conversation Ingird envisages without greater openness to critique, and a much wider range of schools of thought part of the conversation.
JW Mason 10.17.11 at 4:50 pm
As with Barry it seems to me as if we are talking about unrelated issues (in my math mode, I’d say orthogonal). There’s no relationship at all between the validity of the case for micro-foundations and the usefulness or otherwise of math. Both sides of the micro-foundations case can be (and are) argued in every mode from purely verbal to highly mathematical.
Well, yes and no. Not identical but not entirely orthogonal. There’s some relationship. I read a fair amount of contemporary work in macroeconomics. Many papers — most published in major journals — include a section deriving behavioral claims (e.g. that a firm finds external finance more costly than internal finance) from an explicit model of optimizing by individual agents. In a typical paper, the substantive empirical work might be preceded by 5-10 pages of calculus, which could have been dispensed with if it were rhetorically acceptable to simply base behavioral claims on observation rather than explicitly deriving them from microfoundations. (And it is rhetoric — almost all empirical macro papers with microfoundations include additional assumptions about behavior that are *not* derived from those microfoundations.) In this sense, the need for microfoundations introduces more math into the typical paper than it would otherwise require. (And I don’t think it’s too much of a stretch to say that this is precisely what they’re there for, at least partly.)
Or again, it may be possible to make the same basic argument in a DSGE model and a simple structural model. But I think the fact that the first is so much more mathematically demanding has to be counted as a real cost. It crowds out other kinds of knowledge.
But of course I would never say that you shouldn’t use math. That would be silly.
Glen Tomkins 10.17.11 at 4:52 pm
” …one small ‘green’ bank (Triodos)”
Who would name a bank after the place where Oedipus killed his father?
JW Mason 10.17.11 at 4:53 pm
Colin @27 reflects my experience as well.
Barry 10.17.11 at 5:25 pm
John Quiggin 10.17.11 at 3:20 pm
” Barry@12 I’m not seeing the link between my comment and your response. FWIW, I agree with the point made in the response.”
JQ@1: “That’s not to defend a lot of what’s done in mathematical economics, but a variant of Sturgeon’s Law/Revelation applies here – 90 per cent [in bad moods I’d go for 99] of mathematical econ is crap, but then 90 per cent of everything is crap.”
When judging a field, there’s a big difference between that 90% being at the bottom, or at the top. There will always be cranks, hacks, and frauds in any field; the field is in trouble if those guys also occur at the top.
Patrick S. O'Donnell 10.17.11 at 5:39 pm
@ 20
If you re-read carefully what I wrote you should be able to answer your questions (which means I still think you’ve not captured fairly her argument, i.e., she does not look to physics or any other science for an emulative model of ‘rigor’ for economics), so I’m afraid I’m unable to address the reasons for your confusion.
Jim Harrison 10.17.11 at 5:40 pm
It has been said that a language is a dialect with an army. Neoclassical economics is a simulation game with an army.
Ingrid Robeyns 10.17.11 at 7:05 pm
Colin @27 touches upon what I believe the most crucial point: the need for a much greater openness to critique and the much wider inclusion of schools of thought. Yes, and since most economists will take criticism badly and will react defensively (at least in my experience, and I am sure I am not an outlier), someone will now object: but don’t we have neoclassical and behavioral and new institutionalism and neuro-economics and a few more? Yes, but they still represent only a small fraction of the possible terrain. And if there is on the terrain of what economics could valuably be a part that’s closer to ‘the arts’ than ‘the sciences’, then that part is excluded for sure (from this it does NOT follow that the critique is anti-mathematics, rather the unjustified exclusion of the arts-type methods-based streams in economics). Also largely excluded: the part of the terrain that deals explicitly with values – there where economics and ethics meet. Yes, again, there are exceptions – Marc Fleurbaey is an obvious name that comes to my mind (as well as Amartya Sen, obviously).
All disciplines have streams that are pushed to the margin – but having spend significant amounts of time in three disciplines (economics, political sciences and philosophy), my bet is that the institutional/systematic exclusion of dissenters, and the non-willingness to engage with other minds, is much stronger in economics than in the other two disciplines.
Interestingly, in the Sustainable Finance Lab, bankers who are still working in a major bank (hence excluding the two small ‘green’ banks that we have in the Netherlands), are as defensive to criticism on the financial sector and their role in the current crisis, as economists are about their discipline; but some (perhaps most, that was unclear) ex-bankers, including those who have worked as (investment-)bankers not just for a couple of years but some for many years, are much more able to engage with criticism and have a self-critical attitude towards themselves. I think cognitive dissonance is key to all of this, in addition to an organisational/scholarly culture which only allows particular types of criticism.
John Quiggin 10.17.11 at 7:09 pm
@Barry I certainly agree that the field is in trouble. I just don’t think math is central to the trouble. On reflection, though, I’ll back off a bit on this, and agree to some extent with JWM. The demand for micro foundations in macro has been met by DSGE and the scope of DSGE has been limited by the demand for models which admit rigorous mathematical solutions.
But to reformulate my point in the light of comments, we all seem to be agreed that the main problem is mathematics but the use of mathematics in models that are unsatisfactory in other respects – unrealistic or rigged to produce rightwing answers. Anticipating the likely responses, wouldn’t it be better for critics to avoid mentioning mathematics altogether, and cut straight to the fundamental problems.
Anyway, sorry for derailing the thread at comment #1. I’ll leave the math issue for now, and try to comment a bit on what’s wrong with econ and how it can be made right. At one time, I would have said the big need is for more realistic models of individual behavior, but I think a fair bit of progress has been made there. Admittedly, lots of economists still stick to rational egoism, but I think they are on the losing side of the debate.
The big gap, I think, is in understanding social phenomena like trust and confidence, in a way that translates into predictions of economic behavior. In that context, work on social capital is a start, but only a start, because we don’t really know anything (or at least I don’t) about the dynamics of social capital over timeframes relevant to macro outcomes.
Bruce Wilder 10.17.11 at 7:59 pm
nostalgebraist @ 5 and Patrick S. O’Donnell @ 16
One aspect of The Secret Sins of Economics essay that I found odd was the defense of laissez faire as a virtue of economics, and a virtue she defends against unnamed criticisms she attributes to the more literary among us. Particularly in relation to the second point of the Ingrid Robeyns post, laissez faire would seem to be a symptom of the disease.
I wondered whether you had had any thoughts on this.
nostalgebraist 10.17.11 at 8:10 pm
@ 32
Maybe I’m incredibly dense, but I still think it’s possible to read McCloskey as supporting a more physics-like methodology. For instance (from “Secret Sins”):
Such stuff has taken over fields near to economics, first political science and now increasingly sociology. A typical “theoretical†paper in the American Political Science Review shows that under assumptions A the comity of nations is broken; in the next issue someone will show that under A’ it is preserved. This is not theory in the sense that, say, physics uses the term. Pick up a copy of the Physical Review (it comes in four versions; pick any). You will see that the physicists use in nearly every paragraph a rhetoric of How Much. Even the theorists as against the experimenters in physics spend their days trying to figure out ways of calculating magnitudes. The giveaway that something other than scientific is going on in “theoretical†economics (and, alas, political science) is that it contains not, from beginning to end of the article, a single attempt at a magnitude.
Now maybe she doesn’t think that it is not a bad thing that “something other than scientific is going on in ‘theoretical’ economics” (though check out those scare quotes — combined with the earlier implication that the physicist’s sense of theory is the right one!) But if so, why would she make this particular critique, in this particular way? I can’t see how one could read the paragraph above as anything but a value judgment in favor of “theory” in the physicist’s sense.
(To all: if this line of argument seems too tangential, I’m not super-attached to pursuing it.)
Tim Wilkinson 10.17.11 at 8:29 pm
JQ (and any other takers of course) – I’d say as well as more realistic models of individual behavior, different modes of interaction need to be addressable. Bilateral exchange (for money) and its tailor-made criterion of ‘optimisation’, local Pareto-improvement, should not be a given. Other forms of organisation need to be at least capable of being assessed. This is necessary even in the ‘market’ since most production takes place inside large firms which are, internally, command economies. But it’s also necessary to look at entirely non-marketised forms of production.
For example, take British Rail pre-privatisation, which it seems provided far better value for money than the current privatised and fragmented system. I may be wrong but my impression is that neoclassical economics is not equipped to explain how a public service ethos and non-profit-making structure works, nor properly to analyse all the problems (100 different flavours of moral hazard) that come from attempting to ‘marketise’ the provision of a public service like that.
I’m sure various partial ad hoc analyses can be devised, and suitable jargon terms exist for various of the issues involved, but a serious attempt to deal with the topic in an ideologically unloaded way ought to have a comprehensive comparative analysis ready to answer the basic and important questions of which works better, and why, and in what respects.
Maybe there is such a readily available analysis; I’m no economist. But I certainly have the impression that there isn’t. If there were, it would perhaps engage, among other things, those ideas of trust and confidence.
(Also, the relatively far simpler issue of calculations of the ‘public sector comparator’ for PFI projects, of which just about the only certain thing is – and always has been – that they were – and are – an obvious stitch-up. Maybe that was just down to a lack of whistleblowers or of people willing to listen to them, but the impression I have is that the economics left enough leeway for that issue to be at least somewhat unclear. Probably just naked corruption, come to think of it.)
Or high street banking. On the OWS open thread there was near unanimity that this should be nationalised rather than left in public hands. I’d suggest that one should at least consider alternative structures for the provision of commercial lending, too or even various other methods of investment. It’s not as if anyone denies that every real economy is a mixed one, even by extant gerrymandered standards of what constitutes government ‘interference’, so this kind of issue can’t possibly be regarded as some outré bit of exotica from the furthest reaches of left field. Yet I’m not sure that the current state of economics allows this kind of possibility straightforwardly to be explored (again, I may be wrong).
There was also on the OWS thread great certainty in some quarters that the stock market as currently constituted is absolutely indispensable on pain of economic ruin; but the explanation of why that is was at best sketchy, at worst deeply unconvincing, in a ‘we need cars because otherwise buttocks would hit the tarmac at high speed’ kind of way. How is it that such a fundamental aspect of real-world economic organisation does not have a ready-made, copper-bottomed, clear and distinct justification (or, more plausibly I ‘d have thought, evident lack thereof) available on tap? (Again I’m willing to be convinced, but not just to assume, that I’m simply ignorant on this point.)
nostalgebraist 10.17.11 at 11:04 pm
@36
My impression is that McCloskey seems to believe that the libertarian implications of mainstream economics aren’t dependent on the methodologies that she finds suspect. (I think she says this explicitly somewhere.) It’s odd, because she uses the idea that “trade makes everyone better off” as an example of one of those useless theorems that economists are always trying to prove from specialized assumptions, yet she still appears to believe that trade makes everyone better off and that this is deeply significant. I don’t really know why.
In any case, I like that part of the essay for rhetorical reasons. If you show the essay to an Econ 101-influenced libertarian, the part about Laissez-faire will draw them in, making them trust McCloskey enough to give her methodological argument a fair chance. And once they give those arguments a chance, their sense that libertarianism has been proven by Serious People Doing Serious Science With Serious Numbers may start to disappear, hopefully taking the libertarianism with it. (Granted, this process has not happened with McCloskey herself, but her libertarian convictions apparent come from some mysterious alternate source.)
Patrick S. O'Donnell 10.17.11 at 11:33 pm
Being of Marxist suasion (as a layperson, not a professional) in economics, I have no wish to defend McCloskey’s libertarian politics or her views on economics generally. However, one should read her last two books for a more sustained and nuanced argument as to her views on this score, just as one is better off reading Knowledge and Persuasion…(and several other books for that matter) than her little pamphlet Secret Sins… for a fuller account of her take on methods in economics.
Patrick S. O'Donnell 10.17.11 at 11:39 pm
Just curious as to why my latest comment was in need of “moderation.”
Peter T 10.18.11 at 1:00 am
JQ at 35 points to one big gap – understanding of social behaviour. This is not exclusive to economics – a lot of recent political and social theorising finds it hard to grapple with what older thinkers took for granted, that humans are by nature social animals, and so becomes angled up trying to explain social behaviours in terms of a reductive individualism. What’s often missing is a sense that people live/form/are formed by complex social structures, that these are not natural, that they evolve, that a large part of human life is devoted to maintaining or trying to modify these structures, and that their complexity exceeds our conscious grasp.
Economics could pay more attention to areas like anthropology or sociology, but the result – given that economics is as much driven by the desire to manipulate our social reality as to describe it – may be to open those fields to similar levels of politicisation.
Watson Ladd 10.18.11 at 2:56 am
Of course free trade makes everyone better off! A voluntary transaction benefits both parties, because they otherwise wouldn’t engage in it. Austrians don’t use math and believe in laissez-fair, basically by using some version of the argument I just used.
TheF79 10.18.11 at 3:43 am
Watson Ladd @43 beat me to it by a hair, but I wanted to point out that there are plenty of hard right laissez-faire economists out there that dislike complex mathematics in economic arguments. In fact, many of the arguments made in the preceeding comments have been made by Hayek, Coase, etc. When I use “the maths” to show why markets fail to provide environmental goods, free-market environmentalists complain about how I’m using “the maths” to obscure the holy truth of markets, a truth so clear it doesn’t need mathematics to illuminate it.
The point JQ (I think) was trying to make is that models are models, and they come in verbal form, graphical form, algebraic form, calculus form, etc. Any new school of economic thought that arises to replace the current paradigms will still provide models of “how things work” and the level/quantity of mathematics will be orthogonal to the quality of those models. So let’s focus on the models themselves and what they’re missing, as opposed to the method of presentation of those models.
By the way, I’m always a bit surprised how often econometrics gets ignored in discussions about mathematics, economics and science. At least in my field, it isn’t the analytical theorists who dominate the lead journals.
Meredith 10.18.11 at 4:35 am
As a non-economist, I’ve read the post and comments with great interest, and a great sense of being a stranger in a strange land. Not because I don’t see anything familiar in the discussion — I do — or valuable — I do. Rather, because of the absence of certain things I seek as orienting landmarks, the kinds of question being posed at asked at Occupy Philosophy, for instance.
I was expecting to see commenters raise more fundamental questions, like, what is an economy? Cui bono — Who benefits? What is beneficial? Why do we organize and then, given our ends, how should we organize the accumulation of capital and its distribution?
Measure away, by all means, using “applied math.” But what is being measured and why? That is the kind of question I would have thought “Occupy Economics” would be raising. (Not just a nod to other social sciences. How about literature and the arts?)
nostalgebraist 10.18.11 at 5:00 am
I want to sort of apologize for my comment above (where I talked about “applied math,” etc.) — it was literally written while having the last few sips of my morning coffee before rushing out the door, and was not a result of any thought process more complicated than “ooh, Crooked Timber is having a thread on the problems with economics, I should write something about the problems I see in economics.” I didn’t mean to suggest that my attitude is any sort of paradigm for what an “Occupy Economics” movement would be like, or even what criticisms of orthodox economics should be like. It’s just one criticism.
But I do think that the failures of economics on its own scientific/scientistic, quantification-based terms is very important. The libertarian conclusions that are commonly drawn from economics are simply based on arguments that are (I think) very poor by the standards of any mathematical science other than economics. The flaws in the standard right-wing economic arguments are mundane technical flaws, and this means that it’s politically (not just technically) important to fix mundane technical flaws.
Meredith 10.18.11 at 5:09 am
nostalgebraist, I meant my “applied math” as a complement, actually. Having hung around physicists and astronomers in an earlier life, and (still earlier) having come from a family with an engineering streak in it (I might leave my Latin homework to join dinner, where transformers or nuclear energy would be topics of conversation at family meals), I recognized immediately (I thought) what you were getting at.
Eric Titus 10.18.11 at 5:18 am
I think it’s time to think a little about what it means to be a part of the “Occupy” movement. I’d like to present a simple critereon: if you haven’t taken part in the protest in a meaningful way (that means actually going to the protest at least once), you aren’t part of the movement. You may be a movement supporter–along with half the Democratic congressmen–you may even be a radical. Basically, my question to anyone who claims to “support” OWS but hasn’t actually been there is “why not?” It’s not a personal diatribe, it’s just a question to provoke reflection. In the same way, Occupy Philosophy won’t be a movement until people actually act.
Eric Titus 10.18.11 at 5:25 am
One of my favorite passages in Marx seems to be relevant:
“German ideologists say that Germany experienced an unprecedented revolution during the past few years. The decomposition of the Hegelian philosophy that began with Strauss developed into a ferment of worldwide proportions affecting all “powers of the pas.” Gigantic empires grew in the general chaos, only to decline again.Heroes emerged, only to be hurled back again into obscurity by bolder and mightier rivals. The French Revolution was child’s play in comparison…in three years, more of the past was swept away in Germany than in three centuries at other periods.
All this is said to have happened in the realm of pure thought.”
[Easton and Guddat translation]
Bruce Wilder 10.18.11 at 7:01 am
@39: “. . . her libertarian convictions apparent come from some mysterious alternate source”
Apparently, her libertarian convictions come from the power of narrative storytelling.
@46: “the failures of economics on its own scientific/scientistic, quantification-based terms is very important”
Indeed. The most serious critiques use economics against economics. It doesn’t seem to matter much to many of the economists, though.
mulp 10.18.11 at 8:05 am
The big contrast between form of the protests.
The TEA party is classical in form, just like the antiwar movement, is it defined the solution – cutting taxes which means cutting government – and then defines the problem: too much government, or in the case of antiwar: too much military-corporate war mongering for profit.
Occupy Wall Street has just focused on the problem: over the past three decades, Wall Street has seemed to grow in power and wealth while the worker and individual has lost power and wealth.
What is the solution?
Some groups have rushed in, perhaps cautiously because they saw the Tea Party movement cooped by various factions, with their classically conservative solution: roll back the past three decades – restore union to 1980, bring back Glass-Steagal, bring back Smoot Hawley, etc.
The not-leaders of Occupy have so far resisted or suppressed such knee-jerk solutions,instead resorting to more democratic processes. Meetings where issues are discussed and debated and votes taken, and certainly people agreeing to act on things agreed to.
I happen to be an engineer in high tech, and what I learned from the people I worked with is the best results is when you erase the solutions and instead start from understanding the problem. I see Steve Jobs starting from the problem: ugly in form and fashion. He was obsessed with beauty: the produce out of the box must be beautiful, and using it must be beautiful. He never started with “it must use Motorola chips” or “it must have a three button mouse”, but instead looked for the beauty of intuitive use.
Likewise, the Occupy has started from the problem: the American Dream is fading, out of reach.
And the politicians and economists and political scientists have been proclaiming the way to the glorious future is x, y, z, where x might be tax cuts, z might be markets, z might be military force, so one should question anyone claiming to have the solution.
We are the 99% began as a scream of helplessness, but it seems to be shifting to the power of numbers. If 99% vote by thinking together and not paying attention to the ads paid for by the 1%, all of a sudden the 99% have the power of the vote which trumps the power of the purse held by the 1%.
chris 10.18.11 at 1:32 pm
In particular, I agree with Krugman that it’s far from clear that they system can’t survive with stagnant real wages, as long as the rich keep spending.
Isn’t one of the most consistent properties of the rich that they want to invest more, and consume less, than the poor? So if more income is diverted to the rich, consumer spending falls, which makes investing in more means of production unattractive, while at the same time more people are looking to invest more money in something. Who wants to invest in a factory to make something the rich don’t need more of than can be produced by already-existing factories and the poor can’t afford? Isn’t the result highly likely to be either an asset bubble, the invention of creative forms of investment to absorb the additional investment dollars, or both at once?
There’s a certain amount of 20/20 hindsight in this, I admit, but it seems sound as a basic explanation for how rising Gini drives economic instability. Too many investment dollars chasing too few productive nonfinancial investments.
If for some reason you actually *wanted* to make this worse, you could tell the middle class that they all need to save up, individually, for their own retirements. Then they’ll all cut back on present production and try to invest at the same time, amplifying the dropping consumption/rising desire for investment that you’re already seeing from distributional shifts.
john c. halasz 10.18.11 at 5:19 pm
Tim Wilkinson @3:
“the article’s inclusion of the splendid fact, new to me, that the Economics ‘Nobel Prize’ is fake. It’s actually a ‘Sveriges Riksbank Prize’ paid for by Sweden’s central bank and artfully arranged to look like a Nobel.”
http://ineteconomics.org/video/30-ways-be-economist/philip-mirowski-why-there-nobel-memorial-prize-economics
dbk 10.18.11 at 5:31 pm
Re: quantitative vs. qualitative presentation of economics discussed above:
Brian Collins has a new piece in the Los Angeles Review of Books about two volumes by a Greek economist, Yanis Varoufakis (et al.), one of which is highly quantitative and the second of which offers a prose presentation of more or less the same material. Cf. http://lareviewofbooks.org/post/11567586093/the-great-shock.
Varoufakis, a Professor of Economics at the Univ. of Athens, has been shopping around his “A Modest Proposal” for salvaging the Eurozone over the past several months. He’s been well received by many economists in Europe, though not by the powers-that-be, and has now turned extremely pessimistic that the Eurozone is salvagable by any means. Yesterday evening he suggested on Greek national television that the haircut would be in excess of 50% (the number currently being bandied about by the Greek MSM).
Bruce Wilder 10.18.11 at 6:03 pm
@52
Two other points.
1.) Increased income inequality in the U.S. has been driven in approximately equal parts by increasing pay for CEOs and other “stars”; and by
2.) an increasing share of national income going to Capital (as opposed to Labor), financial or real.
Wages, in other words, are being squeezed in a vise, by both the top of the Management class and by the Capitalist class. The implication of rising average productivity alongside stagnant wages (=marginal productivity) is that the capital stock is shrinking relative to the labor force.
Contra Krugman, the conservatives might be right. The problem of unemployment is “structural”, in the sense that the economy has moved to a new equlibrium, attached to a smaller capital stock, which simply doesn’t have “places” for a significant part of the labor force, who are now consigned to the reserve army of the unemployed. They have neither the tools to produce, nor money income to create demand; they’ve fallen out of the circular flow, and there is no way back in.
For Capital seeking to maintain return or Management seeking to keep its big paydays coming, there’s no honest path forward, that is to say, there’s no path in which Capital and Management expand production through expansive real investment projects, which employ (and compensate — direct a flow of real goods and services to) the whole labor force. Such expansive real investment would have the effect of increasing wages and Labor’s share of national income. Instead, Capital and Management can achieve their goals by disinvesting (both privately, cum transfers to China, and publicly with political support for austerity and neglect of public infrastructure) and by financial “investments” in predatory activity (e.g. usury, for-profit health insurance, derivatives, etc).
john c. halasz 10.18.11 at 6:28 pm
Bruce Wilder @ 55:
1) The capitalist class and the management class are increasingly one and the same. This was discussed at J.W. Mason’s site under the rubrique of debt-financed stock buy-backs and (and PE LBOs).
2) They are investing, just over there and not over here. Again through successive waves of organizational and technological re-structurings, without perfect foresight and coordination, corporate rents have been restructured through the conjoint phenomena of globalization and financialization of both production and asset flows, which, in turn, is fundamentally based on arbitraging FX “deviations” or differentials, thereby stove-piping corporate rents, both productive and unproductive, to the top, where access to a share in them and the productive surpluses from which they derive is denied to both organized labor and public expenditure.
Though thanks chris and B.W. for having obviated any need for me to respond to to Quiggin’s (and Krugman’s) obtuseness, since he doesn’t want me to comment on his comments. (Though if they had actually read Marx on the conjoined problems of over-accumulation of capital and maintaining the rate-of-profit, they might have had some clue).
Bruce Wilder 10.18.11 at 8:00 pm
jch: “They are investing, just over there and not over here.”
China, its fixed exchange rates and its appetite for American sovereign debt have played a central role in the course of American financialization and the corporate re-structuring of production often referred to as, globalization. But, I would remember that the Chinese have been the ones investing in China, a fact that will have enormous implications as the crisis enfolds further.
With strategic exceptions, China severely restricts foreign direct investment. In this they have followed the examples of Japan and Korea. The deal that they offer multinationals willing to source high-tech finished goods in China is basically a 25% discount (apart from the FX effects), which serves to allow the multinational, in effect, to keep its rent, without the associated real investment in plant (and its capital costs and risks). Other stakeholders (e.g. labor unions) lose their leverage to claim such completely untethered rents, which is very attractive to top management.
jch: “The capitalist class and the management class are increasingly one and the same.”
There’s definitely a symbiotic relationship, but I would never call it a unity. Back when the capitalist class had firm control of its managers, it was proper to think only of the capitalists. The executive managers and, even more, the financial managers (e.g. hedge fund managers) are now not just a distinct power, but the superior power.
We’re talking about a situation of disinvestment, in which the returns to capital are being bolstered by additional return of capital and an increasing part of gross output is consumption of capital. The actual Capitalist is bound to be more concerned about eating her seed corn than the overseer or manager, who is skimming the margin. I’d maintain the distinction.
JW Mason 10.18.11 at 8:21 pm
The actual Capitalist is bound to be more concerned about eating her seed corn than the overseer or manager, who is skimming the margin.
I’m not sure this is necessarily true. The manager’s status is bound up with the survival and growth of a particular firm or industry. The capitalist just wants to collect an income from it. There are a a lot of persuasive arguments (from Doug Henwood, Dumenil & Levy, Ozgur Orhangazi, etc.) that increasing power of capitalists as such vis-a-vis managers has been associated with a downward shift in investment.
JW Mason 10.18.11 at 8:26 pm
Back when the capitalist class had firm control of its managers, it was proper to think only of the capitalists. The executive managers and, even more, the financial managers (e.g. hedge fund managers) are now not just a distinct power, but the superior power.
I strongly recommend Dumenil & Levy’s Crisis of Neoliberalism on this question. There isn’t a simple before and after story here. The period from the 1890s through the postwar decades did see an increase in the power of management. But the period of neoliberalism — basically 1980 on — has seen that partially reversed in “the revenge of the rentiers”, with a major reassertion of the power of shareowners (and owners of other financial assets) over nonfinancial firms. Along with that, there’s been an erosion of the specific managerial ethos and a cultural assimilation of upper managers to asset-owners.
Bruce Wilder 10.19.11 at 1:34 am
I think Dumenil & Levy may be overly impressed with the rationalizations delivered from financial economics and the Chicago school. They’ve called this the crisis of neoliberalism, which is naming the era for its cover story, not its true dynamic. If there’s been a major re-assertion of the power of corporate shareholders vis a vis top executives, I’ve missed it.
I hope you will follow up and do a review of their latest essay on slackwire.
John Quiggin 10.21.11 at 1:07 am
I think it’s safe to say that on a list of the fundamental problems of mainstream economics, inadequate attention to the principal-agent problems involved in corporate control would not make the top #100. Thanks, jch, for killing another thread.
john c. halasz 10.21.11 at 6:25 pm
@62:
I’m mystified how the accusation that I “killed” this thread could possibly be arrived at. I made only two comments here, one a link to a rather interesting intellectual history research project on the Bank of Sweden prize, the other a response to a Bruce Wilder comment, which itself was a response to another comment on, not the OP, but @7. If no one else wished to make any additional comments, I’m somehow to blame? I didn’t make any further comments, if for no other reason than because I spilled coffee on my keyboard, and only just now have replaced it. Further, I fail to see how the inference was drawn that I claimed that “mainstream economics” had ignored agent/principal problems. To the contrary, the only indirect implication that could be drawn from what I actually typed was that it was the agent/principal problem in corporate governance that gave rise to the claim, starting in the 1980’s, the rewarding top executives with stock options and grants would align their incentives with share-holders/owners and thereby increase productive efficiency by maximizing share-holder “value”, after which executive compensation in the U.S. began to sky-rocket and top executives increasingly became a concentrated bloc of share-holders, against more diffuse share-holder interests, and were given motives to manipulate present share prices and financialize operations at the expense of longer-term productive investment. We could go on to discuss the agent/principal problem with financial professionals managing pension and mutual funds and how that tends to align them with top management, but why bother?
I don’t know what goes on in the august mind of John Quiggin, but it’s sometimes very screwy.
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