Tag Archives: economics

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.

 

 

Starfish economics

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I’ve been reading Tyler Cowen’s new book, [amazon_link id=”0525953736″ target=”_blank” ]Average is Over[/amazon_link], and will post a review next week. As a taster, though, here is a comment from the short section on the state of economics:

“Economics is becoming less like Einstein or Euclid and more like studying the digestive system of a starfish.”

This intriguing description of the subject comes in the context of a chapter on how technology is changing science in general. For economics, the changes mean much more data and higher standards for empirical research, alongside a recognition of the complexity of the analysis or theory required. Field experiments, RCTs and laboratory experiments are where the action is in terms of scientific progress.

[amazon_image id=”0525953736″ link=”true” target=”_blank” size=”medium” ]Average Is Over: Powering America Beyond the Age of the Great Stagnation[/amazon_image]

I agree with the direction of this argument but am a bit more pessimistic about the extent to which these changes have a grip on the profession in general. A lot of economists are still not very interested in starfish guts.

Popular economists

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I’m taking part in a panel discussion on “Disseminating Economic Research in the Policy Debate” at the European Economic Association and Econometric Society Congress next month. Starting to think about what I’ll need to think about to prepare, I picked up [amazon_link id=”0262025620″ target=”_blank” ]Lives of the Laureates: Eighteen Nobel economists[/amazon_link] edited by William Breit and Barry Hirsch. I have the 4th (2005) edition of this interesting series.

[amazon_image id=”0262025620″ link=”true” target=”_blank” size=”medium” ]Lives of the Laureates: Eighteen Nobel Economists[/amazon_image]

The series has got up to 23 Nobel economists now.

[amazon_image id=”0262012766″ link=”true” target=”_blank” size=”medium” ]Lives of the Laureates: Twenty-Three Nobel Economists[/amazon_image]

Some common themes stand out – the drive to contribute to making it a better world, the sense of being dismissed or disregarded by peers, but also in many cases either the ambition or the actuality of contributing to public debate in an accessible way.

For example, Gary Becker here describes getting a call from Business Week asking him to contribute a regular column, and not turning down the invitation, on the advice of his wife. He says: “It was hard for me to learn how to write a popular column. Writing short requires far more effort than writing long….. I do not know why they asked me, to tell the truth, but the experience has been great for me. It has taught me how to express economic ideas in a simple and non-technical way. I will make the assertion that every single important economic idea can be stated simply. … And when people state that an ideas is too complicated to state simply, it usually means they do not know how to state it simply, sometimes because they do not fully understand it.”

I wholeheartedly agree. Blogging and social media have given all academic economists the opportunity to write for the public, and I applaud the ones who can combine their scholarly work with the important work of communicating important ideas simply. Becker has taken to the online world, with the excellent Becker-Posner blog, always worth a read.

Words and the worldly philosopher

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On the strength of the introductory chapter, I’m really going to enjoy Jeremy Adelman’s biography of Albert Hirschman, [amazon_link id=”0691155674″ target=”_blank” ]Worldly Philosopher.[/amazon_link] Adelman talks about his subject’s love of words:

“Hirschman’s work represents an effort to practice social science as literature. It is what makes him appear so original in style and content now the bonds between literature and social science have increasingly been severed. ….. [H]e made of his style a kind of rampart from which to warn us, without giving up on humor, of the perils of over-specialization, of a narrowing of vision, and of the temptation to fall in love with one’s own technical prowess and vocabulary, and lose sight of the vitality of moving back and forth between proving and preaching.”

[amazon_image id=”0691155674″ link=”true” target=”_blank” size=”medium” ]Worldly Philosopher: The Odyssey of Albert O. Hirschman[/amazon_image]

I also like Hirschman’s insistence on being wary about strong claims and grand theories, intended to free social science from the shackles of historical specificity – the kind of humility economists have been urging on themselves since the onset of the crisis, without quite managing to achieve it.

Like many economists of my generation – in graduate school at the height of the rational expectations/real business cycle madness – I was never taught anything of Hirschman’s work. The only book of his I’ve read is [amazon_link id=”0674276604″ target=”_blank” ]Exit, Voice and Loyalty.[/amazon_link] I’ll obviously have to set that right after finishing this biography.

[amazon_image id=”0674276604″ link=”true” target=”_blank” size=”medium” ]Exit, Voice and Loyalty: Responses to Decline in Firms, Organizations and States[/amazon_image]

Putting people in economic theory

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Some books are hard to judge. I can’t decide whether [amazon_link id=”1107678943″ target=”_blank” ]An Economic Theory of Greed, Love, Groups and Networks[/amazon_link] by Paul Frijters with Gigi Foster is brilliant or barking. It looks appealing, an attempt to combine the good aspects of the theoretical rigour of choice theory based on self-interest with the realities of human emotions. Of course love and group identity shape our choices! The book has endorsements on the back from economists I greatly respect. Andrew Oswald calls it, “The most remarkable book I have read in the last decade…. a book that is intellectually taxing but unforgettable.” Jeffrey Williamson and Bruno Frey love it too. So embarking on reading this, I thought it was going to be in the rich tradition of the Adam Smith of [amazon_link id=”0143105922″ target=”_blank” ]Moral Sentiments[/amazon_link].

[amazon_image id=”1107678943″ link=”true” target=”_blank” size=”medium” ]An Economic Theory of Greed, Love, Groups, and Networks[/amazon_image]

Instead, it’s a more difficult and theoretical read. It’s best explained in a blog post by Paul Fritjers, who says:

“[W]e take the stance of aliens looking at humans as just another species, with love merely one behavioural strategy available to that species. Blasphemous as this may sound, our goal is to apply the scientific method to the realm of the heart.

At the most basic level, we contend that love is a submission strategy aimed at producing an implicit exchange. Someone who starts to love begins by desiring something from some outside entity. This entity can be a potential sexual partner, a parent, “society”, a god, or any other person or abstract notion.From a position of relative weakness, the loving person tries to gain control over this entity.”

In fact, there are four core concepts, including the fundamental one of self-interested choice (‘greed’), in this alternative decision theory. They are love, groups (and power relations) and networks. These concepts are selected from all the other possibilities social scientists have suggested as important in shaping economic choices, such as social norms, freedom, identity, institutions and so on. How they are selected is not fully explained; the author says it follows much work on the explanatory power of each as a potential core concept but I am puzzled about the selection and the mix of categories – emotions, social structures, descriptors of status. Nor did I ever really understand how ‘explanatory power’ was tested. One could say that any of these concepts is self-evidently important in some way in individual choices and social outcomes.

A large chunk of the book sets out this rather odd idea that love is a generalised ‘Stockholm syndrome’ (as Andrew Oswald describes it on the back), a means of getting something from a more powerful person or entity. Apparently, neuroscience says love is not an emotion and nobody is pre-programmed to love anything: “A child needs to be stimulated to develop the ability to love… Unlike many animals, humans do not necessarily love forever what  they bonded with in childhood.” So the book goes on to explain the ‘evolutionary advantage of the love program’, and fits love into the mould of power relations. This takes the book onto a discussion of groups and power, and from groups to networks and markets. These sections touch on other, familiar areas of sociology and network theory.

Somewhere in the necessarily quite dense chapters on this wide-ranging material, I lost track of how the four core concepts lead us to a new choice theory. The final section of the book does look at how the new theory applies in familiar economic contexts. I focused on competition policy, and was disappointed to find that the consequence is to add not much to mainstream economic theory: “The view at which this book arrives regarding competition regulation is thus very close to the standard mainstream view in terms of the merits of any individual case. What is added is an understanding of who the regulator actually are and why they are there, what keeps them honest, where their power comes from, and what language affected parties will use in their appeals to regulators.” But how weird to add an understanding of the regulator and yet not an understanding of how big companies accumulate power and lobby regulators and politicians.

I think the book wants to rescue the fundamental assumption in economics of self-interested choice and make it relevant given all that we’ve learned about evolution, neuroscience and psychology in recent times. I thoroughly applaud this aim, because it is consistent with the evidence from evolutionary biology. Finding out how all this material across the disciplines can be married in a theory of decision making, on which economic models can build, is an important research agenda. This book is an ambitious effort to do so. It didn’t work for me, but now I’d like a lot of other people to read it and say what they think.