Rather as Galileo and Newton used to make sure to profess allegiance to the doctrines of the Holy Church, “One Economics, Many Recipes” asserts firmly in its introduction that the book is firmly in the neoclassical tradition and that although substantial use is made of case studies, the author is a believer in the catchechism of econometrics – the validity of cross-sectional regressions as a means of extracting underlying structural facts. In actual fact, however, the first cross-sectional regression does not appear until page 170, and when it does it really does throw into sharp relief the weakness of cross sectional regressions relative to case studies (it’s a regression which uses one of those Freedom House indices as if it were an unproblematic proxy for “democratic institutions”)
Reading the book, I increasingly grew to believe that it’s an intentionally subversive piece of work. Rodrik is correct in the introduction to say that he uses orthdox neoclassical approaches side by side with institutional methods, but the manner in which he does so seems to be almost designed to show the neoclassical approach in a bad light. As the book progresses, the case studies and verbal arguments are so interesting and insightful, and the neoclassical models and regression results so thin and unproductive by comparison, it seemed to me that he was doing it on purpose, to show what dare not be said – that well-chosen and thoroughly researched case studies are almost always the best way to analyse something and that as a means of making meaningful cross-country comparisons, regression analysis is almost always dreadful.
Let’s get specific here, because I think I disagree with Dani on what it means to be “neoclassical”. The passage of interest is in “A Credo of Sorts”, from the introduction.
First, this book is strictly grounded in neoclassical economic analysis. At the core of neoclassical economics lies the following methodological predisposition; social phenomena can best be understood by considering them to be an aggregation of purposeful behaviour by individuals – in their roles as consumer, producer, investor, politician and so on – interacting with each other and acting under the constraints that their environment imposes.
This is basically a statement of methodological individualism and fine as far as it goes. But if this was all there was in the way of a membership criterion for the class “neoclassical economic analysis”, then I think that JK Galbraith would also be “strictly grounded” in it too – particularly as it’s clear from the passage here and the context that “individuals” include people like corporate managers, government officials and even heads of state, who all of them have substantial ability to impose their will on the world as well as “acting under the constraints that their environment imposes”. I am tempted to say that this in itself pushes Dani toward the border with heterodoxy – a lot of neoclassical analysis makes an assumption of methodological atomism which rules out this sort of agent. But like the small-country assumption in open economy macro, methodological atomism looks like the kind of thing that genuinely can be relaxed while staying in the overall paradigm, so I don’t think that this can be grounds for quibbling with the book’s neoclassical orthodoxy.
On the other hand, JK Galbraith isn’t strictly grounded in neoclassical analysis, so if Dani’s book is, then what’s the difference between them? Basically, as far as I can see, there is another methodological assumption which is constitutive of neoclassical analysis; that the interactions between individuals and their environment are usefully describable by certain kinds of mathematical function[1]. What kinds? Well, any rigorous description will certainly have counterexamples, and I take the David Lewis approach to counterexamples, so I’ll just say that the mathematical membership-criterion for neoclassical economics is defined by a Wittgensteinian family resemblance to Cobb-Douglas production functions.
And in this sense, the book certainly is strictly grounded in neoclassical analysis. But it achieves this grounding at the cost of introducing a methodological contradiction. If you read it straight through you don’t notice this much, but flip back and forth and it almost looks like some chapters of the book are scolding others.
So in chapter 2, the central problem of institutional reform is set up in good neoclassical style as a second-best problem. The constraints on institutional form are expressed as the Lagrange multipliers of an optimisation problem, and the economist community is encouraged to think in terms of local shadow prices (rather than grand overarching schemes) in making its policy recommendations. Hurray for this, by the way.
There’s no real contradiction here – Dani says the same thing again a couple of times in the more institutional chapters. But there is a methodological contradiction, because in order to set up the model in Chapter 2, the author has to help himself to a set of parameters tau which index the size of the distortions in economic activity and a set of parameters mu which represent the marginal valuations. Mu is perhaps a debate for another time and place, because the existence of utility functions is a background controversy for the whole of economics. But what about tau, the handy number which indexes the size of the wedge in every industry between social and private value as a result of institutional distortions?
Does any such function exist? Highly doubtful. If it did, would it be the right kind of function to ensure the existence of the relevant Lagrange multipliers? Even more doubtful. Chapter 6 agrees with me, discussing at length the complexity, irreducibility and geographical and historical specificity of institutions. Basically, national political, economic, legal and tacit institutions are the quintessential self-organising process. Most of them are how they are “just because”. There isn’t any index of institutional constraints on the realisation of investment returns, any more than the Freedom House numbers really index the degree of deomcracy in a country.
Now it is possible (as the book shows, by doing it) to say sensible things about institutions, and to make sensible predictions about what might be the effect of your actions upon them. But these sensible things and sensible predictions just don’t have mathematical descriptions which are in the class of functions that are “neoclassical economics”. Encouraging economists to think about institutional constraints as “shadow prices” is pretty sensible, even though there are already problems with that, since it is not always the case that different institutional constraints can be decoupled in the straightforward sort of way in which one would need in order to think of them as a price[2].
But motivating them to think of institutional reform in this way by setting it up in terms of Lagrange multipliers is a bit funny, in my view. As far as I can see, the correct conclusion is the institutional one, Chapter 6 represents Dani’s actual argument, and the main way in which neoclassical analysis is used in the book is as a means of persuading neoclassical economists[3].
So in other words, I think that “One Economics, Many Recipes”, is a rather more subversive book than it seems, and this is all to the good. The message that I really took away from it is that there is no substitute for detailed factual knowledge, which seems to me to be exactly right. Coming from the business school side of the street, it seems pretty obvious to me that this is the way in which economics (and not just development economics) ought to be going.
[1] Perhaps this should just be “by mathematical functions”, but I think it very much stretches conventional usage to consider Paul Davidson or Barkley Rosser as part of neoclassical economics. I think I’ll return to this angle later.
[2] What do I mean here? Well, let’s think about auto engineering. What’s the tradeoff between fuel efficiency and speed? Pretty straightforward – not completely so but you could probably draw up a reasonable schedule which would have enough shape to it to give some rough idea of the tradeoff between fuel consumption and speed. Now a more difficult question. What’s the tradeoff between fuel efficiency and reliability? Not obvious at all. Usually a more efficient engine is also a more reliable one (just as a more stable computer
operating system is also a more secure one). Does this tradeoff even exist? Is there a meaningful fuel consumption/reliability tradeoff and should you treat your estimate of the “price” of interval between breakdowns in mpg as representing anything meaningful at all? In my view, no. Lots of institutional tradeoffs are more like this (think about democracy and security) and therefore the idea of treating institutional reform as a shadow price might be a bit more difficult than one thinks.
[3] “Economics is very useful as a source of employment for economists”; JK
Galbraith
{ 31 comments }
dsquared 11.13.07 at 6:26 pm
A brief experiment in industrial policy; if I “seed” this post with a small comment, will it form the nucleus of a self-sustaining cluster of discussion?
John Emerson 11.13.07 at 8:41 pm
In response to the mention of the Holy Church I wanted to say something about scholasticism and the stifling nature of the late medieval Sorbonne, but I thought you might not want your thread to start out with something from the house troll.
Then I was going to go on to the heroic story of Jan Zizka, who used innovative non-scholastic methods to hold off the Pope and the Empire for decades.
But I didn’t.
John Emerson 11.13.07 at 8:46 pm
I suppose I could just link to my suggestion that econmics be divided into separate theoretical and practical disciplines, the way physics and engineering are, with theoretical economics aiming at unity and appled economics (economics engineering) plural according to the varying goals aimed at. Applied economics would be effectively normative, since applications require goals, which are normative.
Xavier 11.13.07 at 10:15 pm
dsquared,
Your link to “Freedom House indices” links to a post on Cato’s Economic Freedom of the World Index. Are you saying that Cato’s index is more or less the same thing as the Freedom House Index of civil rights and democracy, not produced by Cato? Why? Granted Freedom House’s index is not perfect, but it does not seem obviously wrong as a proxy for democracy, unlike the Cato index of economic freedom.
Alex 11.13.07 at 10:43 pm
That’s a surprisingly good idea, John.
D2, meanwhile, one thing I strongly remember about reading Keynes for the first time – I checked out the Royal Economic Society Complete Works volume by volume from the Bedford Library at RHUL and called it “revision” – is exactly how case-specific and based on actual information his policy criticisms were.
It’s interesting that if you provide a shitload of maths in order to demonstrate that under various circumstances that you quite happily accept never exist in practice, X holds, and therefore country Y should pursue X at all costs, you’ve provided rigorous microfoundations; but if you provide a shitload of data, and even maths too, to demonstrate that the assumptions in X don’t exist in country Y, you’re a journalist. Urgh.
dsquared 11.13.07 at 11:27 pm
Yeah, Galbraith has a surprisingly (or unsurprisingly of course, he was in the vanguard of the American Keynesians) of exactly the same sort of stuff – never massively complicated but always well-thought out.
John Emerson 11.13.07 at 11:31 pm
I spent over a year living in one of the success stories in 1982-3 — Taiwan. I’m sure that there were some freemarketer rules that they followed, but there sure were a lot that they flouted.
What I saw with my own eyes was 200% tariffs on “luxury imports”, government monopolies of rice and energy, government ownership of a substantial chunk of the transportation system, a (tiny) subsidized local auto industry, and industrial policy favoring certain industries and encouraging imports.
The freemarketer things I saw were weak unions, weak environmental protection, weak consumer protection and workplace safety protection, and (I think) low taxes on business.
I really doubt that economists ever said “Look at what Taiwan did, since it worked, and do the same thing”. Except for the things in the immediately preceding paragraph.
I remember only dimly, but sometime that year a speak by someone in the finance ministry explicitly rejected the free-marketer model in favor of what was called the “French model” mixed economy.
Down and Out of Sà i Gòn 11.14.07 at 1:15 am
Daniel: did Rodrik use the Freedom House rankings, or (as your link suggested) Cato’s Economic Freedom rankings? If it is FH, that’s far worse that Cato, a “pure” think-tank, which doesn’t try to meddle in other countries’ affairs.
Freedom House seems to function as a quango of the US – part analysis, part money conduit to pro-U.S. NGOs/candidates (the distinction seems to be blurred) in other countries. That’s gotta skew their results.
John Emerson 11.14.07 at 2:48 am
You know, threads not trolled by me get few comments. You guys oughta be paying me (and mayby abb1).
notsneaky 11.14.07 at 3:55 am
“then what’s the difference between them?”
Here’s the answer as I see it (and others, including Dani Rodrik and JKG if he were around, might very well see it differently):
One Economics, Many Recipes, still says, in the end “remove distortions”. Not all of them at once. Be judicious about how they interact. Leave some in place for the time being. Get input from various community interests about what the best way to remove them is and in what order. Be wary of the fact that removing one may make others worse, so you got to think carefully about how you will proceed. But in the end, you want to remove distortions not add them.
JKG basically says “it’s a second best world and there’s market failures everywhere”. So what you want to do is ADD new distortions or AMPLIFY the old ones. Because in a second best world that somehow COULD lead to a better outcome. So, um, price controls! Planning!
Yeah, it’s a crude simplification. But I think it characterizes the difference in the general outlooks. The devil’s in the details and all that, nonetheless that does seem to be the difference between them.
(notably both approaches are possibly justified by the neoclassical theory of second best)
dsquared 11.14.07 at 6:42 am
8: he used the FH rankings – I linked to me mocking the Cato ones because I could find the link.
10: I think it’s more a case of a neoclassical economist calling anything he doesn’t like a “distortion”. After all, JKG’s first book and constant view was that he didn’t like antitrust regulations and thought oligopolies were a natural and important part of the US economy, whereas yer neoclassicists would typically say that someone from the government ought to come along and decide on the correct industrial structure for the telecoms industry.
notsneaky 11.14.07 at 8:29 am
Well, no. A “distortion” has a pretty clear meaning in neoclassical economics. At least conceptually (in practice it might be difficult to operationalize and all but here we’re looking for a framework to clarify our thinking); a divergence between marginal social benefit (or cost) and marginal private benefit (or cost – just slap a minus sign in the right place).
(After all, neoclassical economics is all about marginal trade offs)
Two distortions which work in opposite directions (as monopoly power and incentive to innovate do) are still two distortions. You might get lucky and they might exactly off set each other but in an ideal world you don’t want either of them (in the proper sense of the word “want”).
The standard approach of a neoclassical economist coming to this situation would be (should be?) to say a) hey, there’s two distortions working in opposite directions here, let’s estimate some elasticitities, b) how important is this distortion in the big (general equilibrium) picture in terms of social welfare and c) what policy instruments do we have at our disposal anyway? (and also d) “the gubbmint, can we trust it with the policy instrument?”)
Part of the message of OEMR that I get is that the Washington Consensus folks definitely forgot about b) and to a large extent about a) and sometimes worried too much about d)
But the approach is still pretty neoclassical.
(The point that liberalizing capital accounts could only deliver small gains and carried large risks was emphasized by neoclassicals like Bhagwati even as WC was getting under way).
I don’t know what neoclassicals you’re talking about with respect to regulatin’ oligopolies. It’s like a caricature of the Chicago school caricature of neoclassical economics. Sometimes two distortions offset each other. Sometimes they don’t.
dsquared 11.14.07 at 9:07 am
I think that it is pretty orthodox neoclassical economics, in and out of Chicago, that there is a role for antitrust policy. I just brought this up because I thought that your characterisation of Galbraith as always advocating controls and planning was unfair. But getting to the heart of the issue:
a divergence between marginal social benefit (or cost) and marginal private benefit (emphasis added)
This is my point (I think Dani also misunderstood it in his response so I clearly wasn’t clear enough). “Marginal” in context, can’t be understood as anything other than a mathematical assertion about the relationship between inputs and outputs; it surely has to be unpacked as at least asserting the existence of local first derivatives of output with respect to the inputs. It’s not far off the assertion actually made in the book, that the distortions in the book can be indexed to a set of continuous real variables and their costs identified with the Lagrange multipliers on those variables.
That’s the big difference here and its importance depends on how common you think it is for an economy to have problems which don’t fit well into this model. It’s not hard at all to think of cases (and Dani actually raises a few cases where something similar seems to be at work) where there aren’t any wedges between marginal private and marginal social returns, but everyone’s still bloody poor because the relevant returns are just too low.
The neo-classical model is probably flexible enough even to have situations like this shoehorned into it by postulating some global hidden variable, and that’s what Dani does in the neoclassical sections of the book. But it seems to me that when we get to that stage, the neoclassical model is just being used as a way of persuading neoclassical economists to accept conclusions that have been arrived at by other means.
dsquared 11.14.07 at 9:17 am
(just further to the above, imagine a perfectly anarchocapitalist tribal economy buried somewhere in the Amazon. There are certainly some big differences out there between the social and private return on some things that people in the Galbraithi tribe could do, like discover penicillin. But a) it’s not 100% obvious to me that the relationship between inputs and outputs can be described by the sort of one-to-one mapping that the variable tau implies and b) even if tau exists, the difference between the social and private returns from discovering penicillin isn’t anywhere near the point where the economy is today, which would presumably be in an equilibrium – even human capital and increasing-returns type distortions might not exist since there’s no technology to invest in.
notsneaky 11.14.07 at 10:01 am
““Marginal†in context, can’t be understood as anything other than a mathematical assertion about the relationship between inputs and outputs;”
Uh, sure, I guess. It means “one extra of something vs. one extra of something else”. It does have a quite nice mathematical interpretation but it doesn’t have to be mathematical.
When a recipe says “season to taste” I don’t bust out the Lagrangian. I take pinch of salt, put it in, taste it and then decide whether a marginal pinch of salt would improve the taste.
“it surely has to be unpacked as at least asserting the existence of local first derivatives of output with respect to the inputs.”
No it doesn’t. Where you get that from? You’ve weirded me out on this before. If you don’t like the word “marginal” just put in “extra change” in it or something. Or, like, look in the “excercise” section of any Principles book which go to a great length to make sure the student doesn’t encounter the notion of “infinitesimal change” (i.e. a derivative) and deals with your regular clumpy, indivisible changes. The freakin’ reason why Mas-Collel integrates his ice cream is simply because it’s easier than checking a bunch of inequalities (that joke is funny for reasons other than you think).
” It’s not far off the assertion actually made in the book, that the distortions in the book can be indexed to a set of continuous real variables and their costs identified with the Lagrange multipliers on those variables.”
No no no. First, again, the “continuous” in there is just a matter of convenience. Nothing changes if it’s replaced by, well, “common sense” (unless you think economic phenomenon are “dragon teeth functions: http://mathworld.wolfram.com/DirichletFunction.html)
Second, um, real valued. Ok, let’s leave that alone. And again if you don’t like “Lagrangian multiplier” or “shadow price” then how about just “the importance of a distortion (as previously defined).
Finally,
“It’s not hard at all to think of cases (and Dani actually raises a few cases where something similar seems to be at work) where there aren’t any wedges between marginal private and marginal social returns, but everyone’s still bloody poor because the relevant returns are just too low.”
Yes, that’s the freaking point of the book (well, that chapter at least). Those Lagrangian multipliers are so low that the taus’ don’t matter.
The condition is
lambda*(stuff)=0. Either one of those being zero satisfies the condition and lambda being low means almost precisely what you just said, except I guess your way has the word “bloody” in it.
If you’re gonna go all “there are phenomenon in this world which can’t be captured by maths” than go all “there are phenomenon in this world which can’t be captured by maths, and writing stuff down in terms of mathematical equations (which have common sense, straightforward translations into late forms of Latin bastardized Germanic dialects) cannot help us! Ye Odin! Poor Harolds!”. But then don’t bring derivatives and continuity and real numbers into it, because none of these are in any way important to the point.
notsneaky 11.14.07 at 10:13 am
(taking your Amazon tribe, all that equation says is that if you have a society where all kinds of things are screwed up (by definition, since that’s what we’re talking about) and you change one of the things that’s screwed up then the effect on the overall well being/screwed up-ness etc. of this society is going to be the direct effect of making that one screwed up thing less screwed up weighted by how much that one screwed up thing is important in the overall well being of the society (which could be small) plus the effect of un-screwing that one thing on all the other screwed up things in this society, each one judged by how important their screw ups are in overall well being of this society (some of which’s screwed upness could go up and some which’s could go down). I took differences there, not derivatives, just so you know, so it applies to non-continuous, non-differentiable possibly even imaginary types of screwedupness.)
I might have made mistake though and it’s much easier (simpler, more understandable, more precise and easier to get across) if you write it as a solution to a Lagrangian problem. Really, it is.
)
Tracy W 11.14.07 at 10:49 am
that as a means of making meaningful cross-country comparisons, regression analysis is almost always dreadful.
I find cross-country regression analysis useful as a means of disproving theories. Very Popperian.
dsquared 11.14.07 at 11:00 am
And again if you don’t like “Lagrangian multiplier†or “shadow price†then how about just “the importance of a distortion (as previously defined).
Are you arguing with me or Dani Rodrik here? Dani agrees (see his response) that the essence of neoclassical economics is that “the importance of a distortion” can be given a specific mathematical representation, and that this representation is going to bear some kind of resemblance to the equations they teach you on economics courses. I agree with him, but think that in lots of interesting cases, “the importance of a distortion” can’t, or that this isn’t a productive way to analyse real world problems.
“It means “one extra of something vs. one extra of something elseâ€.
One extra what? One kilogram of something? One joule of something? One automated lathe versus one bushel of rice? You and I (and Rob Vienneau) know how that one ends up. And this isn’t even the main problem with the NC approach.
If you’re gonna go all “there are phenomenon in this world which can’t be captured by maths†than go all “there are phenomenon in this world which can’t be captured by maths, and writing stuff down in terms of mathematical equations (which have common sense, straightforward translations into late forms of Latin bastardized Germanic dialects) cannot help us! Ye Odin! Poor Harolds!â€. But then don’t bring derivatives and continuity and real numbers into it, because none of these are in any way important to the point.
Yes they are, because there are a specific set of assumptions about both preferences and production functions which are characteristic of neoclassical economics, particularly to do with aggregation, but not only. If Dani had written the entire book in terms of input/output tables, then it would have been very mathematical but it wouldn’t have been “strictly grounded in neoclassical economic analysis”, for example, would it?
dsquared 11.14.07 at 11:14 am
I took differences there, not derivatives
no, you talked in general terms about institutions. You didn’t even assert the existence of a production function. And it was only confusing because you were trying to use language that could easily be mapped on to the constrained optimisation problem in your mind. So in other words, you were doing worse institutional economics than you’d normally be capable of because you were trying to ensure that it could be translated into a particular kind of equation that’s characteristic of neoclassical economics.
I might have made mistake though and it’s much easier (simpler, more understandable, more precise and easier to get across) if you write it as a solution to a Lagrangian problem
Easier to talk about it in some ways but not others, easier to avoid some kinds of mistakes but not others.
I mean, consider the Leontief table for some primitive economy. You can either approach the analysis of that table by constructing an aggregate production function and looking at the constraints on overall growth, or by leaving it as a table and start interviewing businessmen to try and guesstimate the inter-industry coefficients. One of these approaches is neoclassical and one of them isn’t.
dsquared 11.14.07 at 11:25 am
Those Lagrangian multipliers are so low that the taus’ don’t matter
Not in the relevant Lagrangian equation. But at some level of analysis, something similar to the tau parameter is describing the set of institutional constraints which are stopping this tribe from getting on a canoe and going to a place where the life expectancy is more than 30, so they clearly do matter, just not in a way that’s very well described by the equation.
I mean, you can answer the question “what would the impact be on the Japanese economy in 2006 from the decision to enter the Second World War on the German side in 1942?” in terms of
but once you’ve written that book, it doesn’t make a lot of sense to translate it back into Lagrangian problem, even though it would be quite easy to do so if you’re helping yourself to tau(feudalism), tau(vintage of capital stock) and tau(return on domestic savings).
notsneaky 11.14.07 at 11:40 am
“Are you arguing with me or Dani Rodrik here?”
You, very very very obviously.
“One extra what?”
This ain’t the Cambridge Capital Controversy. We’re not talking about factor intensities here. Or heterogeneous capital or the index problem. Why you bringing stuff up that is irrelevant (like continuity, derivatives, and now this)? If your problem with this whole thing is that one can arbitrarily define “Social Welfare” (which % changes in is what this is being measure in) then just come out and say it: “I don’t think one can measure Social Welfare”. If you think that subjective value theory is bunk and it should all be measured in the bushels of corn then … well … I think the framework still applies if one measures Social Welfare in terms of bushels of corn (and in that case your objections are neither here nor there and that’s basically what you should’ve said at the start)
What’s your point?
“Yes they are, because there are a specific set of assumptions about both preferences and production functions which are characteristic of neoclassical economics, particularly to do with aggregation, but not only”
No, there are actually not. Nothing in this whole freaking thing about any kind of freaking production functions. Maybe, just maybe something about preferences. In the sense that at some point or another someone somewhere has to decide what exactly someone somewhere wants (i.e. Social Welfare). Bushels of corn if you like.
dsquared 11.14.07 at 11:58 am
Why you bringing stuff up that is irrelevant (like continuity, derivatives, and now this)?
Because it’s not irrelevant. In so far as this book is “strictly grounded in the neoclassical tradition” (which I don’t think it really is, but its author does), that means that it uses aggregate production functions and their derivatives with respect to various parameters of interest as its main tool of analysis. That’s what “strictly grounded in the neoclassical tradition” means. If it was always analysing things in terms of big changes from equilibrium, or discontinuous output responses to input changes, or in disaggregated terms, then that wouldn’t be in the neoclassical tradition.
Nothing in this whole freaking thing about any kind of freaking production functions
Yes there is, and the fact that it’s not explicit doesn’t mean there isn’t; look on p58. “… where [mu^s and mu^p] represent net marginal valuations of activity i by society and by private agents, respectively. Of course, they depend not just on the set tau of distortions, but on levels of consumption, labor supply, asset holdings and so forth […]”. In other words, the “activities” i have a value because of their contribution to overall production of final consumption goods. This is actually made explicit further up the page; “[these distortions] prevent the best use of the economy’s resources and, in particular, keep the economy far below its attainable productivity frontier”.
You keep trying to argue that words like “frontier” don’t really mean anything specific and should just be unpacked as meaning “the maximum amount of stuff we can make”. But that’s throwing out the entire point of neoclassical economics, which is that it’s meant to be rigorous; this is the big advantage and disadvantage.
notsneaky 11.14.07 at 12:03 pm
Re 20
Yes. It is maximization subject to constraints. Go back to c) in 12.
???
dsquared 11.14.07 at 12:05 pm
I really don’t understand what that means. My #20 didn’t ask a yes/no question.
notsneaky 11.14.07 at 12:29 pm
That’s what you think.
dsquared 11.14.07 at 12:35 pm
Well perhaps you could be kind enough to tell me what you think that question is, then?
Alex 11.14.07 at 1:15 pm
…which pretty much sums up everything that is wrong with neoclassical economics. Great answers to questions that don’t exist in reality.
Badger 11.14.07 at 2:24 pm
john emerson: once things wind down here, I wonder if you would be interested in coming over and trolling my latest post on Iraq policy
dsquared 11.14.07 at 4:36 pm
I would understand it this way (maybe I ought to post this on my own blog).
You can describe these approaches with two features 1) the policy rule and 2) the means by which it’s operationalised.
Thus, old Washington consensus would have as its policy rule 1) “eliminate all distortions” and operationalising method 2) “all areas where there is a government regulation are distortions”.
Chapter 2 Rodrik has 1) “eliminate distortions biggest to smallest, ranked by their impact on welfare”, and 2) “the impact of a distortion on welfare is measured by its Lagrange multiplier in the tau-mu equation on p58”. That’s “strictly in the tradition of neoclassical economics”.
Chapter 6 Rodrik has the same 1), but 2) “the importance of a distortion on welfare is something you have to take an educated guess at based on the particular history and institutions of the country. There’s no systematic way of finding this out, so it has to be a process of trial and error carried out by the local governments”.
Two points here. Chapter 6 Rodrik isn’t “strictly in the tradition of neoclassical economics”. You could, with a following wind and a couple of freaky instruments, get econometric estimates of tau and mu and carry out the optimisation, but this is specifically what Rodrik doesn’t advocate. Second, the Chapter 6 process involves estimating the importance of the distortion directly – it doesn’t have an intermediate stage of estimating tau, as far as I can see, so it’s not even implicitly recognising that the Lagrangian analysis has a role to play, except as a way of sugaring the pill for neoclassicals to persuade them to accept that they’re going to have to do institutional economics.
If things had turned out differently and Sraffians ran the world (with neoclassical economics an odd little heterodox outpost laughed at by all), then Chapter 2 would have said that you should prepare an input-output table for the economy, record the departures from the input output table which reflected the global technological optimum and concentrate on removing those departures from global best practice which had the largest effect on market price production of final consumption goods. If Chapter 6 said “it is impossible to put together this kind of counterfactual input-output table, so you have to look at the institutions and try and direct policy toward sectors which are most important”, then I would also say that Chapter 2 wasn’t really doing much work and that the claim in the title to be “strictly in the Sraffian tradition” was untrue.
Seth Edenbaum 11.16.07 at 1:49 am
It would be useful to separate methodological and philosophical individualism.
One is a useful oversimplification, the other an argument that it’s not an oversimplification.
Seth Edenbaum 11.16.07 at 4:44 pm
Something else to add, since the two posts following this seminar on individualism at Crooked Timber are one on the perils of atomized culture and yet another celebration of it: Isn’t it great to be a middle-aged man who spends all his free time reading comic books?.
The problem isn’t one of institutions or individuals but of how individuals relate to institutions. Books that concentrate on rules for economic policy are about as useful as books that promise to teach you how to pick up girls.
Rules don’t make societies any more than rules make games. Games exist in the playing, and since there are no umpires in society who are not also players themselves, we have to trust our playing partners to make the honest call more often then not even when it’s in our favor. Ever play tennis?
Crises in society come about not because the rules break down but because rules are all there are left. The gearbox is fine, but there’s no grease. And what’s grease?
That’s the unasked question.
What percentage of the population in any country takes individualism as the model for behavior, up to and including the sort of sociopathological individualism economic science seems to prefer as it model? Both American political and economic liberals think mostly of social and religious conservatives and looney leftists as anti-individualist. And of course there’s the army. But the Scandinavian model is based on it. Social democracy is based on it. Religious conservatives counter the ideal of individual freedom with limits originating in god, social democracy with limits originating not in the state but in the community of which the state is a creature. That’s not a problem if we think of individuals as creatures of community. I speak and write in English, and I try to do so “well.” That means I do so expecting to be judged by others. As an individualist why would I care what others thought? Again the posters at CT celebrate individuation and bemoan atomization by turns. What can I say?
Europeans aren’t nearly as afraid of determinism as historically Americans have been. The question of free will is seen as an amusing conundrum not a problem with an answer. Cartesian philosophy never stopped being literature. But the formal structures of social democracy are beginning to appear now in US. While the academy is discussing libertarianism from above, academically mandated anarchism as the last hope for modernism, everyday post-modern [second modernist?] social-democracy is coming up from below.
So I’ll ask you: What percentage of the optimism now permeating academic thought can not be explained by reference to social determinism, as pathology? My sense of cautious optimism is based on something else entirely, the sense that people are getting used to there being unsolvable problems and are developing the capacity to accept the ad hoc. The academy is drying out, but the world’s getting greasy.
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