Tag Archives: economics

Integration of the social sciences

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Yesterday I quoted the 1827 UCL prospectus definition of economics, with its emphasis on “accurate observation and precise language,” and capsule definition of ‘the science of political economy’ as, “the production, distribution and consumption of wealth, or the outward things obtained by labour, and needed or desired by man.”

I was mulling over the difference between this and Lionel Robbins’ famous 1932 definition of economics (in [amazon_link id=”B002ZZ0U8A” target=”_blank” ]An Essay on the Nature and Significance of Economic Science[/amazon_link]): “The science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.” The greater abstraction compared with the ‘political economy’ of a century earlier is all too apparent.

In his 1948 Newmarch Lectures, [amazon_link id=”1107673860″ target=”_blank” ]The Role of Measurement in Economics[/amazon_link], Richard Stone added this gloss to the Robbins definition:

“While many situations in actual life have an economic aspect, few if any can be analysed wholly in economic terms. Taken literally, however, it would bring the applied economist practically to a full stop since he cannot in general estimate the importance of economic factors unless he is prepared to make assumptions about…certain non-economic factors, such as changes in tastes. In fact he can frequently do this for himself in a rough and ready way, although undoubtedly it would be a gain if he could fall back on other branches of the social sciences for help in such matters. The moral of Robbins’ definition is that in applied work much more integration of the social sciences is needed.”

Hear, hear!

The science of political economy

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My thanks to Professor Ian Preston of University College London for the earliest definition (in England) of the subject of economics – it’s from the 1827  Statement by the Council of the University of London Explanatory of the Nature and Objects of the Institution:

The object of the science of Political Economy is to ascertain the laws which regulate the production, distribution and consumption of wealth, or the outward things obtained by labour, and needed or desired by man. It is now too justly valued to require any other remark, than the occasional difficulty of applying its principles, and the differences of opinion to which that difficulty has given rise, form new reasons for the diligent cultivation of a science which is so indispensable to the well-being of communities, and of which, as it depends wholly on facts, all the perplexities must finally be removed by accurate observation and precise language.

The wonderfully Victorian optimism contrasts with Nassim Taleb’s disdain for economists, which bellows from every other page of [amazon_link id=”0141038225″ target=”_blank” ]Antifragile[/amazon_link]. I’m rather enjoying it so far, but he has a very low opinion of economists, especially those of us who are Harvard-trained (he always refers to it as ‘Stalin-Harvard’). He has it in for nail polish too, and as I occasionally wear it, that’s another strike against me. However, he does like Ariel Rubinstein’s [amazon_link id=”1906924775″ target=”_blank” ]Economic Fables[/amazon_link], an excellent book (and winner of the 2012 Enlightened Economist Prize).

[amazon_image id=”0141038225″ link=”true” target=”_blank” size=”medium” ]Antifragile: Things that Gain from Disorder[/amazon_image]

I met Taleb once –  it was in late 2001 at the launch in London of my book [amazon_link id=”1587991454″ target=”_blank” ]Paradoxes of Prosperity,[/amazon_link] around the same time as [amazon_link id=”0141031484″ target=”_blank” ]Fooled by Randomness[/amazon_link] was published and about to make him massively famous. He had shaved his beard and was travelling as ‘Nicholas’ not ‘Nassim’ at the time, I recall him telling me. He was charming and polite, far from the aggressive and slightly deranged – although hugely interesting – persona that comes across in his books. [amazon_link id=”0141034599″ target=”_blank” ]The Black Swan[/amazon_link] and [amazon_link id=”0141031484″ target=”_blank” ]Fooled by Randomness[/amazon_link] are both great reads containing much sense, so I’m looking forward to the rest of [amazon_link id=”0141038225″ target=”_blank” ]Antifragile[/amazon_link]. And I don’t believe economics to be wholly incompatible with Taleb’s worldview – just look at that 1827 definition.

Beware economists bearing PhDs

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A footnote on Joe Studwell’s [amazon_link id=”1846682428″ target=”_blank” ]How Asia Works[/amazon_link]. He writes:

“At the industrial policy-making level, what stands out with the benefit of hindsight is that there was almost no role played in Japan, Korea or Taiwan by economists. Meiji Japan blazed its trail by following the Prussian, and early American, model which rejected the classical economics that began with Adam Smith and David Ricardo. … There was a strong prejudice against the theoretical approach associated with modern economics and in favour of practical problem-solving.”

Studwell goes on to say that at the height of its 1960s triumphs, MITI had just 2 PhD economists (although I’d note that far fewer economists bothered with PhDs in those days). Taiwan’s equivalent bureaucrats were all engineers. The intellectual tradition on which North East Asian industrial policy was based runs from [amazon_link id=”B00ANKL3YY” target=”_blank” ]Alexander Hamilton[/amazon_link] and [amazon_link id=”1596059524″ target=”_blank” ]Friedrich List[/amazon_link] and includes, in the 1960s, Walt Rostow’s influential [amazon_link id=”0521409284″ target=”_blank” ]The Stages of Economic Growth[/amazon_link].

There were other development economists who focused on the specific and the practical rather than the general and theoretical – in their different ways [amazon_link id=”0415312973″ target=”_blank” ]Peter Bauer[/amazon_link] and [amazon_link id=”0815736517″ target=”_blank” ]Albert Hirschman[/amazon_link] – but they were a minority until recently. It’s interesting to see the intellectual tide turning, with the backlash ranging from the emphasis on randomised control trials to Dani Rodrik’s wholly sensible caution in his 2005 paper Why We Learn nothing from regressing economic growth on policies (download pdf from his home page or here). Here Muryat Iyigun ponders the intellectual tyranny of generalisable results when case studies can be so valuable as evidence.

[amazon_image id=”1846682428″ link=”true” target=”_blank” size=”medium” ]How Asia Works: Success and Failure in the World’s Most Dynamic Region[/amazon_image]

Living vicariously

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My eldest son spent his teenage years saying he was never going to end up as an economist (not that I ever put any pressure on him to choose economics). Then he read [amazon_link id=”0349119856″ target=”_blank” ]The Undercover Economist[/amazon_link] by Tim Harford, and became an economist. Next week he starts an MSc course in Economics. Living vicariously, I was looking at the course outline.

It’s 32 years since I was at the same stage in my education, and it is really startling to see how little the curriculum has changed. This is why I organised a conference in 2012 on the economics curriculum (the pre- and post-conference papers are in [amazon_link id=”1907994041″ target=”_blank” ]What’s the Use of Economics[/amazon_link]); and why Wendy Carlin of UCL is launching an initiative to develop a new, open-access undergraduate core curriculum.

Of course, until there is an alternative, most lecturers will carry on doing the same thing as before. Developing a new course by oneself is time-consuming and unrewarded, and the incentives to stick with existing textbooks and problem sets are overwhelming. I was pondering how I might home-school my son for a master’s level course, should he be in the unfortunate position of relying on mum.

For macro, I might be tempted just to give him Tim Harford’s new book, [amazon_link id=”1408704242″ target=”_blank” ]The Undercover Economist Strikes Back[/amazon_link], and the Bank of England’s suite of publications on its model and the Inflation Reports. I don’t see the point of continuing to teach the mathematical general equilibrium and DSGE models, as they are neither true nor useful. I would add, though, endogenous growth theory, via the Aghion and Howitt textbook, [amazon_link id=”0262012634″ target=”_blank” ]The Economics of Growth[/amazon_link]. For micro, Sam Bowles’ [amazon_link id=”0691126380″ target=”_blank” ]Microeconomics: Behavior, Institutions and Evolution[/amazon_link], Paul Klemper’s [amazon_link id=”0691119252″ target=”_blank” ]Auctions: Theory and Practice[/amazon_link] and one of the game theory texts – Martin Osborne and Ariel Rubinstein’s [amazon_link id=”0262650401″ target=”_blank” ]A Course in Game Theory[/amazon_link]? – supplemented by some business economics texts such as Paul Geroski’s [amazon_link id=”0198288557″ target=”_blank” ]Market Structure, Corporate Performance and Innovative Activity[/amazon_link]. For econometrics, Angrist and Pischke’s [amazon_link id=”0691120358″ target=”_blank” ]Mostly Harmless Econometrics[/amazon_link], maybe Clements and Hendry on [amazon_link id=”0521634806″ target=”_blank” ]Forecasting Economic Time Series[/amazon_link], and an actual software package.

Needless to say, this train of thought is just me living vicariously. Wouldn’t it be marvellous to be a student again? Meanwhile, my son is forewarned that I’ll be eager to look at his reading lists when he starts his actual course.

[amazon_image id=”0691119252″ link=”true” target=”_blank” size=”medium” ]Auctions: Theory and Practice (Toulouse Lectures in Economics)[/amazon_image]

Economists, doctors and quacks

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The news of the death of Ronald Coase sent me to his key papers, of course (all listed here), but also to a collection of essays I hadn’t read before, [amazon_link id=”0226111032″ target=”_blank” ]Essays on Economics and Economists[/amazon_link]. He makes some very interesting points about the role of economics in public policy, expanding on the question of how limited government intervention to correct market failures ought to be. Essentially, Coase argued that this is an empirical question. The existence of significant transactions costs means market arrangements can lead to inefficient outcomes, but government interventions are often flawed too. He approves of George Stigler’s work on the political ‘market’, with the firms affected by regulations likely to be the highest ‘bidders’, therefore able to shape regulation in their own interests. (If this seems cynical, think about banking regulation.)

[amazon_image id=”0226111032″ link=”true” target=”_blank” size=”medium” ]Essays on Economics and Economists[/amazon_image]

In ‘Economists and Public Policy’, Coase turns to economists: “The problem is that economists seem willing to give advice on questions about which we know very little and on which our judgements are likely to be fallible, while what we have to say that is important and true is quite simple – so simple that little or no economics is required to understand it.” However, the simple truths are highly unwelcome. The essay goes on to discuss the political and popular resistance to economic arguments against, say, price controls after a bad harvest. “History indicates that these are simple truths which people find it easy to reject or ignore.” The essay is not entirely pessimistic – Coase believed that when the counter-productive effects of policies became too large, the policies would be reversed.

Coase is also trenchant on the character of economics. It is clear he disapproved of the ‘imperialism’ of economics, the Chicago-originated move into subject areas such as family life, previously the terrain of other social sciences. He cannot have been a fan of [amazon_link id=”0141019018″ target=”_blank” ]Freakonomics[/amazon_link]. However, he is pretty scathing, in the essay ‘Economics and Contiguous Disciplines’, about the failure of other social sciences to raise their game in their techniques and attention to evidence – he sees as particular strengths of economics the recognition of general equilibrium effects (everything is connected) and the relevance of economic incentives in other decisions, too often simply denied by other social scientists. Finally, the essay argues that economists need to study contiguous social sciences, “because it is necessary if they are to understand the working of the economic system itself.” He concluded: “We may expect the scope of economics to be permanently enlarged to include studies in other social sciences. But the purpose will be to enable us to understand better the working of the economic system.” His own work, of course, laid the foundations for institutional economics.

There are a couple of interesting essays on Marshall in the book too. Coase likes Marshall’s insistence on the need for both theory and evidence, deductive and inductive reasoning in economics. He obviously found modern economics far too much on the theoretical, deductive (or reductive) side.

I also happened to read this weekend Jamie Whyte’s pamphlet for the Institute of Economic Affairs, [amazon_link id=”0255366736″ target=”_blank” ]Quack Policy: Abusing Science in the Cause of Paternalism[/amazon_link]. There was a brief to-do online about this, with critics noting that it was hardly surprising the free-market IEA had published a pamphlet arguing against government interventions, and how could anyone argue against evidence-based policy? Whyte wrote some years ago an excellent and funny book, [amazon_link id=”0954325532″ target=”_blank” ]Bad Thoughts: A Guide to Clear Thinking[/amazon_link], about the absence of logic and sense in much public debate. The pamphlet looks at several different areas of policy and asks about the standards of evidence underpinning them. It’s obvious where it’s coming from, but it makes a number of sound points.

[amazon_image id=”0255366736″ link=”true” target=”_blank” size=”medium” ]QUACK SCIENCE & PUBLIC POLICY[/amazon_image]

The first two examples are health-related: proposals for minimum alcohol pricing and the ban on ‘passive’ smoking. Any health-related subjects are awash with political correctness and the abuse of statistics; medical people are strongly resistant to the relevance of any economic considerations at all, which one might take more seriously if they were more statistically-adept. In these two chapters Whyte argues that:

(a) a cost-benefit analysis must take account of the costs of outlawing something, and this is rarely done in health matters – NICE guidelines seemingly explicitly rule out consumer welfare considerations (p35);

(b) the incremental risks of the target behaviour are such that these costs can be very small (although he seems to me to underestimate them in the alcohol example); and

(c) the policies ought not to be economically perverse.

Actually, I think he misses the strongest case against a minimum alcohol price, which is that it increases the profits of big retailers by enforcing the kind of retail price maintenance long outlawed by competition authorities. If the government decides alcohol should be dearer, it should raise the rate of duty. This would not, however, be so pleasing to the sellers of alcohol as taxpayers would then benefit, not retailers – see Coase’s essay, above.

Whyte has a chapter on global warming that goes through the debate about how much we should weigh future against current welfare, including the likelihood that future generations will be richer, and that technological progress will occur, in trying to calculate the costs and benefits of action against global warming. (I think he’s sceptical about whether it’s occurring but that isn’t the main point here.) This is the same debate that occurred among economists like Partha Dasgupta, William Nordhaus and Nick Stern when the [amazon_link id=”0521700809″ target=”_blank” ]Stern Review[/amazon_link] was published. It’s a perfectly respectable argument to set out. Then he turns to what he describes as ‘happiness engineering’, where my sympathies are with him entirely. Government attempts to make people ‘happier’ are either obvious – ensure there are plenty of jobs, keep inflation modest – or intrusively paternalistic.

There’s a final chapter, which is too cursory, about the problem of using ‘scientific authority’ as the basis for public policy. “Experts are natural supporters of policies that draw on their expertise and thus naturally inclined to overstate the credibility and importance of their ideas,” he writes. Of course. But is not using expertise really better? Of course we would like policy to be genuinely evidence-based, and it is difficult to assess the epistemological status of proclaimed expertise. However, Coase’s pragmatism is more attractive than Whyte’s all-out scepticism, for all that Quack Policy flags up some good reasons for concern about how ‘evidence’ is used in actual policy-making.

This was a theme of another book I read recently, [amazon_link id=”0815793898″ target=”_blank” ]Government Failure versus Market Failure[/amazon_link] by Clifford Winston, which in this post I compared and contrasted with Hirschman’s writing on [amazon_link id=”067476868X” target=”_blank” ]The Rhetoric of Reaction[/amazon_link]. How you devise and implement welfare-enhancing, effective government policies in complex societies with a wide range of interests bearing on politicians – it’s what we’re all about as economists (and other social scientists).

A new book reviewed by Peter Wilby in The Guardian this weekend looks highly relevant too: [amazon_link id=”1780742665″ target=”_blank” ]The Blunders of Our Governments[/amazon_link] by Anthony King and Ivor Crewe.

[amazon_image id=”1780742665″ link=”true” target=”_blank” size=”medium” ]The Blunders of Our Governments[/amazon_image]

I’m sceptical about a lot of government interventions and also sceptical about leaving everything to the mythical market; it seems the only evidence-based possibility. We should demonstrate due humility by avoiding overclaiming either way.