Economics and Ethics

"Should We Trust Economists?" Yes and no.

Mark D. White

The worst thing to do when I'm trying to write is have Twitter open. Not only is it distracting (obviously), but it can be positively engrossing. So why do I do it? Because it helps me keep me up-to-date on the state of the world and what smart people are saying about important things.

In the last hour, I've seen two articles that pose questions, which I'll take a shot at answering—please feel free to offer your own answers in the comments below.

Question: "Should We Trust Economists?" asks Noah Smith in The Atlantic.

Answer: Yes, but with serious qualifications.

Smith recounts some familiar and valid criticisms of economics and economists, largely focusing on the limitations of economic models and the lack of experimental data with which to test them. He falters, though, when he dismisses alternative approaches, such as Austrian economics, and in a particularly infantile and insulting way. (I'll leave it to my friends at Coordination Problem to address this if they choose.) Except for that piece, Smith gets a lot right. I'll just mention two reservations that Smith fails to address:

a) Economists have a strong ideological and political bent, which consciously or unconsciously influences their work. This may be true of all scientists and researchers, of course, but the arbitrary and heuristic nature of many assumptions in economic models grants economists a great deal of discretion to insert their values and beliefs in their "scientific" models. So when an economists says "my model recommends stimulus" or "my model recommends austerity," keep in mind that this is not an entirely objective statement—nor can it be.

b) Somewhat related to the first point, economists are much better at saying what will happen than what should happen (and that's true even if you're very doubtful about how well they know the former!). When economists say what should happen—that is, what the government should do or what society should aim for—they're assuming a certain goal which is not an economic concept but an ethical or political one, about which economics training lends little specialized insight. So to the extent we should trust economists, we should trust them to recommend ways to get different places, leaving it to our elected representatives, acting through us, to decide where we want to go. (Or, ask a philosopher!)

So should we trust economists? Yes, if we restrict and temper that trust to focus narrowly on what economists do best—trace out the implications of various actions for key economic variables—and keep in mind the limitations of their prescriptions, based on both the limitations of economic science and the inherent ideology of economic models.

Question: "The question libertarians just can't answer," which is: "If your approach is so great, why hasn’t any country anywhere in the world ever tried it?" This comes from Michael Lind at Salon.

Answer: Many reasons, but the most important one is probably the temptation of power and the wealth it artifically creates, which libertarianism minimize. Even if we want to take a more optimistic approach, then I would cite the presumption of some people to think that a) they know what is better for other people and b) they have the right—nay, the responsibility!—to impose this better way of life on them. This is temptaton of a different sort, born of beneficence but grounded in hubris and disrespect. (I trust Bleeding Heart Libertarians will have more to add to this before long!)

On Literature and Liberty: Mario Vargas Llosa

Mark D. White

In today's Wall Street Journal, Mario Vargas Llosa, the winner of the 2010 Nobel Prize for Literature, writes very eloquently (of course!) on the connections between liberty, dignity, and human flourishing. He describes how these ideas, as those of any writer, are an essential and crucial part of his work:

It is the function of the novelist to tell timeless and universal truths through the device of a fashioned narrative. A story's significance as a piece of art cannot be divorced from its message, any more than a society's prospects for freedom and prosperity can be divorced from its underlying principles. The writer and the man are one and the same, as are the culture and its common beliefs. In my writing and in my life I have pursued a vision not only to inspire my readers but also to share my dream of what we can aspire to build here in our world.

More substantively, he describes the different understandings of the word liberal around the world, as well as how the term, along with the associated belief in the efficacy of the free market, have been abused or obscured in various ways:

There are those who in the name of the free market have supported Latin American dictatorships whose iron hand of repression was said to be necessary to allow business to function, betraying the very principles of human rights that free economies rest upon. Then there are those who have coldly reduced all questions of humanity to a matter of economics and see the market as a panacea. In doing so they ignore the role of ideas and culture, the true foundation of civilization. Without customs and shared beliefs to breathe life into democracy and the market, we are reduced to the Darwinian struggle of atomistic and selfish actors that many on the left rightfully see as inhuman.

The market does not operate in an ethical, political, or cultural vacuum, which responsible proponents of it recognize (but for which few get credit).

I'll allow Mr. Llosa the final word (would that I could do that more often!):

The search for liberty is simply part of the greater search for a world where respect for the rule of law and human rights is universal—a world free of dictators, terrorists, warmongers and fanatics, where men and women of all nationalities, races, traditions and creeds can coexist in the culture of freedom, where borders give way to bridges that people cross to reach their goals limited only by free will and respect for one another's rights. It is a search to which I've dedicated my writing, and so many have taken notice. But is it not a search to which we should all devote our very lives? The answer is clear when we see what is at stake.

"Breathtaking in its expansive scope": Individual mandate of the Affordable Care Act rejected again

Mark D. White

The latest blow to the Affordable Care Act came yesterday from a U.S. appeals cout in Atlanta--let me merely repeat what The Wall Street Journal quoted from the opinion today, which makes the case exceptionally well:

[The individual mandate] is "breathtaking in its expansive scope," the court wrote. "The government's position amounts to an argument that the mere fact of an individual's existence substantially affects interstate commerce, and therefore Congress may regulate them at every point of their life. This theory affords no limiting principles in which to confine Congress's enumerated power."

In other words, if the government can impose this kind of "economic mandate"—if it can force individuals to enter contracts with private companies "from birth to death"—there are no longer limits on what it cannot do. "These types of purchasing decisions are legion," Judges Hall and Dubina write.

"Every day," they continue, "Americans decide what products to buy, where to invest or save, and how to pay for future contingencies such as their retirement, their children's education, and their health care. The government contends that embedded in the Commerce Clause is the power to override these ordinary decisions and redirect those funds to other purposes."

The final sentence--emphasis mine--says it all.

See also Ilya Shapiro's commentary on this latest development here.

A fascinating first-person account of the health care reform battles

Mark D. White

Regardless of where you stand on the law, economics, or politics of the Affordable Care Act, I highly recommend Ilya Shapiro's new paper "A Long, Strange Trip: My First Year Challenging the Constitutionality of Obamacare" (forthcoming in Florida International Law Review), in which the CATO scholar details his year of writing, speaking, and debating various legal issues involving the health care reform legislation.

For those of us in academia, the paper provides a wonderful view into the world of think tanks and advocacy--and may even spur some thoughts on the meaning and purpose of the academic life, as it certainly did for me.

Jerry Evensky on Adam Smith, trust, and the Great Recession

Mark D. White

In the latest issue of Journal of the History of Economic Thought (33/2, June 2011) is a new article by Jerry Evensky (author of Adam Smith's Moral Philosophy: A Historical and Contemporary Perspective on Markets, Law, Ethics, and Culture):

ADAM SMITH’S ESSENTIALS: ON TRUST, FAITH, AND FREE MARKETS

ABSTRACT: When trust is shaken, individuals pull back and the market system contracts. Where trust grows, individual energy and creativity are unleashed and the system grows. In Adam Smith’s vision of humankind’s progress, trust is the central theme.

The Great Recession represents a classic case of a crisis of trust. Looking back to the work of Smith offers insight into the role of citizens and the State in creating an fruitful market environment based on trust, and the challenge of this process, given the human frailty of individuals (unfortunately, we are not angels) and the potential for State power to be captured and abused.

Much Ado about Happiness

Mark D. White

Carl Bialik at The Wall Street Journal has an article in today's edition and a blog post from last night, both very evenhanded, about the attempts by governments to measure the happiness of its citizenry, and the skepticism of some regarding the efficacy of this.

For a critical look at the theory behind happiness studies, I would recommend Dan Hausman's article "Hedonism and Welfare Economics" from Economics and Philosophy, 26(3), November 2010.

I have two significant problems with governments purporting to measure happiness (which are similar to my problems with libertarian paternalism), which I hope to explore at length elsewhere.

1) Happiness is too vague a notion, and multifaceted a concept, to be measured with any degree of accuracy, and any instrument that is developed to do so will inevitably reflect the policy preferences of the parties doing the measuring.

2) It is grossly inappropriate for governments to base any policy decisions on what it thinks makes its people "happy" (or wealthy or wise), when what they should do is enable (and respect) the widest range of choices the people can make in their own interests (to whatever extent these interests include happiness). It is not up to the government to decide that we should be "happy" (especially according to some artificial and contrived definition), nor to take measures to get us there.

(See also this older post of mine at Psychology Today, making a similar point about happiness, but in the context of personal happiness and positive psychology rather than political theory.)

The Virtuous Discourse of Adam Smith (at the Mercatus Center)

Mark D. White

From the Mercatus Center today comes "The Virtuous Discourse of Adam Smith," a paper by Michael J. Clark, visiting assistant professor at the University of Baltimore:

Recent academic work has attempted to change the interpretation of Adam Smith from the founder of free-market economics to a proponent of something much more akin to the modern welfare state. This paper will attempt to refute those approaches by analyzing Adam Smith’s views on strategic politeness.

The paper will show that Smith advocated an approach for political discussion that utilizes strategic yielding and caution when necessary. Smith related the approach to that of the Athenian official Solon who put forth laws that attempted to be ―the best that the people can bear. The approach can lead one to moderation, non disclosure, or fudging of extreme views. According to Smith, there was virtue in considering and at times yielding to the prejudice of the public.

The cautious nature of Smith’s approach has been misinterpreted in modern literature. Smith’s caution is being taken for mild to moderate interventionist support. While the works and ideas of Adam Smith remain foundational to modern economics the interpretation of Smith is changing. This paper defends the interpretation of Adam Smith as a strong proponent of liberty based on his strategic approach.

Gordon Brown Extols Adam Smith’s Morals

Jonathan B. Wight

Thanks to Sandra Peart, I received a lovely link from Remy Debes at the University of Memphis. 

Remy highlighted this talk on globalization that Gordon Brown gave at NYU in December.  Note:  fast forward to the 30:28 mark and watch the next to six minutes (up to about 36:45).

Brown argues that the 20th century was a clash between governments and markets; the 21^st century will be about people seeking moral responsibility in both governments and markets, based on personal responsibility and trust. 

In short, economists need to read the classics in political economy and philosophy, starting with Smith’s Theory of Moral Sentiments. 

Which sense of freedom represents "The Moral Heart of Economics"?

Mark D. White

Ed Glaeser's Economix/New York Times blog post from yesterday, "The Moral Heart of Economics," argues that a belief in the value of freedom is "at the core of our discipline." While I appreciate that someone of Glaeser's stature and influence is highlighting the role of ethics in economics, I find his claim regarding the universal economic belief in freedom to be weak, simply because he opens the door for so many interpretations of it:

Economists’ fondness for freedom rarely implies any particular policy program. A fondness for freedom is perfectly compatible with favoring redistribution, which can be seen as increasing one person’s choices at the expense of the choices of another, or with Keynesianism and its emphasis on anticyclical public spending.

But that is certainly not the meaning of freedom that many classical liberals (or any libertarians, for that matter) would endorse--which is not an argument against it, of course, but merely points out that proposing freedom as a uniting value among economists does not carry much water if the definition of freedom is allowed to vary so widely.

(HT: Chris Coyne via Peter Boettke at Coordination Problem.)

Keynes on China’s Currency War

Jonathan B. Wight

Whether you like Keynes or not, he had a genuine knack for prescience.  This week President Obama appointed the head of GE to lead the new Council on Jobs and Competitiveness—presumably aimed at fighting off our international challengers, especially China.  This portrays a view of trade as a game of win-lose.

The failure of macro policy to maintain full employment was the subject of Keynes’ book, and here’s a timely quote on trade from the concluding chapter of The General Theory (1936):

But if nations can learn to provide themselves with full employment by their domestic policy… there need be no important economic forces calculated to set the interest of one country against that of its neighbours.

There would still be room for the international division of labour and for international lending in appropriate conditions.

But there would no longer be a pressing motive why one country need force its wares on another … with the express object of upsetting the equilibrium of payments so as to develop a balance of trade in its own favour.

International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home….

Can anyone doubt that China is using trade as “a desperate expedient to maintain employment at home….”?  The question is whether President Obama, in his declarations over the past year, is also heading in that direction.