Posts Tagged ‘neoclassical economics’
“The question isn’t ‘what can an economy produce today?’, but ‘what can it learn to produce?'”*…
… and how we do we create the conditions to encourage that learning? Industrial policy, one possible answer, is making a comeback. But as Henry Farrell explains, that raises another challenge…
… For decades, economists have argued that state policy makers lack the requisite knowledge to intervene appropriately in the economy. Accordingly, decisions over investments and innovation ought be taken by market actors. Now, the “market knows best” paradigm is in disrepair. It isn’t just that “hyperglobalization” has devoured its own preconditions, so that it is increasingly unsustainable. It is also that some goals of modern industrial policy are in principle impossible to solve through purely market mechanisms. To the extent, for example, that economics and national security have become interwoven, investment and innovation decisions involve tradeoffs that market actors are poorly equipped to resolve. There are good reasons why Adam Smith did not want to see defense policy handled through the market’s division of labor.
What we now face is a quite different kind of knowledge problem. We lack the kinds of expertise that we need to achieve key goals of industrial policy, or to evaluate the tradeoffs between them. This lack of knowledge is in large part a perverse by-product of the success of Chicago economists’ rhetoric. Decades of insistence that economic decisions be handed off from the state to markets has resulted in a remarkable lack of understanding among government policy makers about how markets, in fact, work. This has a variety of consequences. Policy mistakes are more likely. Market actors find it easier to manipulate the understanding of government policy makers, e.g. as to the extent and kind of subsidies required in particular sectors or for particular purposes.
One way to remedy this is to rethink the kinds of specialist education that public administrators receive, both to ensure that low and mid-level functionaries are better equipped to take the decisions they need to take, and to signal increased prestige for non-traditional forms of policy knowledge. As the sociological literature suggests, elite US policy schools such as the Harvard Kennedy School, Johns Hopkins School of Advanced International Studies and Georgetown University (to name three entirely random examples) play a key role not simply in directly imparting knowledge through education, but in disseminating norms about the kinds of knowledge that are considered to be appropriate for policy decisions. These schools have by and large converged on a framework derived from a watered down version of neoclassical [indeed. one might suggest, neoliberal] economics. I argue that new skills, including but not limited to network science, material science and engineering, and use of machine learning would be one useful contribution towards solving the new knowledge problem…
Assuring access to the right tools and techniques: “Industrial policy and the new knowledge problem,” from @henryfarrell in @crookedtimber.
* Joseph Stiglitz (@JosephEStiglitz)
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As we retool, we might send thoughtfully calculated birthday greetings to Paul Collier; he was born on this date in 1949. An economist who specializes in development, he is a professor at Oxford and director of the International Growth Centre.
Collier is a specialist in the political, economic and developmental predicaments of low-income countries, and is probably best known for his 2007 book, The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It. His philosophy, developed there and in his 2010 The Plundered Planet, is encapsulated in his formulas:
- Nature – Technology + Regulation = Starvation
- Nature + Technology – Regulation = Plunder
- Nature + Technology + Regulation (good governance) = Prosperity
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood”*…
… so the quality of those thoughts matters– as does their diversity. Ha-Joon Chang surveys the monoculture of current economic thinking, explains why that’s problematic, and proposes a remedy…
… Up to the 1970s, economics was populated by a diverse range of ‘schools’ containing different visions and research methods – classical, Marxist, neoclassical, Keynesian, developmentalist, Austrian, Schumpeterian, institutionalist, and behaviouralist, to name only the most significant. These schools of economics – or different approaches to economics – had (and still have) distinct visions in the sense that they had conflicting moral values and political positions, while understanding the way the economy works in divergent ways. I explain the competing methods of economists in my book Economics: The User’s Guide (2014), in a chapter called ‘Let a Hundred Flowers Bloom – How to “Do” Economics’.
Not only did the different methods coexist but they interacted with each other. Sometimes, the competing schools of economics clashed in a ‘death match’ – the Austrians vs the Marxists in the 1920s and ’30s, or the Keynesians vs the neoclassicals in the 1960s and ’70s. At other times, the interactions were more benign. Through debates and policy experiments tried by different governments around the world, each school was forced to hone its arguments. Different schools borrowed ideas from each other (often without proper acknowledgement). Some economists even tried the fusion of different theories – for example, some economists fused the Keynesian and the Marxist theories and created ‘post-Keynesian’ economics.
Economics until the 1970s was, then, rather like the British food scene today: many different cuisines, each with different strengths and weaknesses, competing for attention; all of them proud of their traditions but obliged to learn from each other; with lots of deliberate and unintentional fusion happening.
Since the 1980s, however, economics has become the British food scene before the 1990s. One tradition – neoclassical economics – is the only item on the menu. Like all other schools, it has its strengths; it also has serious limitations… neoclassical economics is today so dominant in most countries (Japan and Brazil, and, to a lesser extent, Italy and Turkey are exceptions) that the term ‘economics’ has – for many – become synonymous with ‘neoclassical economics’. This intellectual ‘monocropping’ has narrowed the intellectual gene pool of the subject. Few neoclassical economists (that is, the vast majority of economists today) even acknowledge the existence, never mind the intellectual merits, of other schools. Those who do, assert the other varieties to be inferior. Some ideas, like those of the Marxist school, they will argue, are ‘not even economics’. It’s claimed that the few useful insights these other schools once possessed – say, for instance, the Schumpeterian school’s idea of innovation, or the idea of limited human rationality from the behaviouralist school – have already been incorporated into the ‘mainstream’ of economics, that is, neoclassical economics. They fail to see that these incorporations are mere ‘bolt-ons’, like the baked potato beside a Pizzaland pizza, rather than genuine fusions – like Peruvian cuisine, with Inca, Spanish, Chinese and Japanese influences, or the dishes by the Korean American chef David Chang (no relation), with American, Korean, Japanese, Chinese and Mexican influences…
The problem… is the almost total dominance of one school, which has limited the scope of economics and created theoretical biases and blindspots. In the same way in which the country’s refusal to accept diverse culinary traditions made Britain before the 1990s a place with a boring and unhealthy diet, the dominance of economics by one school has made economics limited in its coverage and narrow in its ethical foundation…
Economics… influences who we are by affecting the way the economy develops and thus the way we live and work, which in turn shapes us… economics influences the kind of society we have. First, by shaping individuals differently, varying economic theories make societies of contrasting types. Thus, an economic theory that encourages industrialisation will lead to a society with more forces pushing for more egalitarian policies, as explained above. For another example, an economic theory that believes humans to be (almost) exclusively driven by self-interest will create a society where cooperation is more difficult. Second, different economic theories have different views on where the boundary of the ‘economic sphere’ should lie. So, if an economic theory recommends privatisation of what many consider to be essential services – healthcare, education, water, public transport, electricity and housing, for example – it is recommending that the market logic of ‘one-dollar-one-vote’ should be expanded against the democratic logic of ‘one-person-one-vote.’ Finally, economic theories represent contrasting impacts on economic variables, such as inequality (of income or wealth) or economic rights (labour vs capital, consumer vs producer). Differences in these variables, in turn, influence how much conflict exists in society: greater income inequality or fewer labour rights generate not just more clashes between the powerful and those under them but also more conflicts among the less privileged, as they fight over the dwindling piece of pie available to them.
Understood like this, economics affects us in many more fundamental ways than when it is narrowly defined – income, jobs and pensions. That is why it is vital that every citizen needs to learn at least some economics. If we are to reform the economy for the benefit of the majority, make our democracy more effective, and make the world a better place to live for us and for the coming generations, we must ensure some basic economic literacy…
Economics is the language of power and affects us all. What can we do to improve its impoverished menu of ideas? The case for economic literacy: “The Empty Basket,” in @aeonmag. Eminently worth reading in full.
* John Maynard Keynes
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As we go to school, we might spare a thought for a candidate for study, David Ricardo; he died on this date in 1823. A political economist, he developed a labor theory of value in his seminal Principles of Political Economy and Taxation, published in 1817; he was instrumental in the development of theories of rent, wages, and profits; and at a time of mercantilist sentiment, he introduced the theory of competitive advance and advocated free trade. Indeed, most economists rank Ricardo as the second most influential economic thinker working before the 20th century, after Adam Smith.
“Wouldn’t economics make a lot more sense if it were based on how people actually behave, instead of how they should behave?”*…
Behavioral economics aims to accomplish exactly that. Its approach has been to catalogue the dozens of cognitive biases that stop us from acting “rationally.” Jason Collins argues that instead of building up a messier and messier picture of human behavior, we need a new model…
From the time of Aristotle through to the 1500s, the dominant model of the universe had the sun, planets, and stars orbiting around the Earth.
This simple model, however, did not match what could be seen in the skies. Venus appears in the evening or morning. It never crosses the night sky as we would expect if it were orbiting the Earth. Jupiter moves across the night sky but will abruptly turn around and go back the other way.
To deal with these ‘anomalies’, Greek astronomers developed a model with planets orbiting around two spheres. A large sphere called the deferent is centered on the Earth, providing the classic geocentric orbit. The smaller spheres, called epicycles, are centered on the rim of the larger sphere. The planets orbit those epicycles on the rim. This combination of two orbits allowed planets to shift back and forth across the sky.
But epicycles were still not enough to describe what could be observed. Earth needed to be offset from the center of the deferent to generate the uneven length of seasons. The deferent had to rotate at varying speeds to capture the observed planetary orbits. And so on. The result was a complicated pattern of deviations and fixes to this model of the sun, planets, and stars orbiting around the Earth.
Instead of this model of deviations and epicycles, what about an alternative model? What about a model where the Earth and the planets travel in elliptical orbits around the sun?
By adopting this new model of the solar system, a large collection of deviations was shaped into a coherent model. The retrograde movements of the planets were given a simple explanation. The act of prediction became easier as a model that otherwise allowed astronomers to muddle through became more closely linked to the reality it was trying to describe.
Behavioral economics today is famous for its increasingly large collection of deviations from rationality, or, as they are often called, “biases.” While useful in applied work, it is time to shift our focus from collecting deviations from a model of rationality that we know is not true. Rather, we need to develop new theories of human decision to progress behavioral economics as a science. We need heliocentrism…
For a thoughtful critique of current thinking and a set of four “features” that might inform a new approach: “We don’t have a hundred biases, we have the wrong model,” from @jasonacollins.
* Dan Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions
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As we dwell on decisions, we might spare a thought for someone who would probably have had little patience for ideas like these, Rose Friedman; she died on this date in 2009. A free-market economist, she was the wife and intellectual partner of Milton Friedman– a father of the “Chicago School” of neoclassical economic thought that underlies the neoliberlism so dominant of late [see here], of which behavioral economics is a corrective/critique– with whom she co-wrote papers and books (e.g., Free to Choose and Capitalism and Freedom) and co-founded EdChoice (formerly the Milton and Rose D. Friedman Foundation), with the aim of promoting the use of school vouchers and “freedom of choice” in education.
When her husband received his Medal of Freedom in 1988, President Ronald Reagan joked that Rose was known for being the only person to ever have won an argument against Milton.
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