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June 2013 posts

How to Stop "The Death of Economics"

Mark D. White

Recently, at The Weekly Standard, David M. Smick opined in a piece titled "The Death of Economics" on the decline of the field over the last 50 years, focusing on the last decade in particular and the increasing hubris among policy-oriented economists:

For decades, hubris has been the common currency of the economic policy world. It is killing the economics profession. In the 1960s and 1970s, for example, liberal economists believed they could eliminate all poverty. In the 1980s, conservatives thought tax policy could permanently raise the savings rate. It turns out other factors also influence a person’s decision to save.

In the first decade of this century, some central bank economists thought they could engineer monetary policy (with the help of global capital inflows) to eliminate the U.S. business cycle. What happened? The underpricing of financial risk helped lead to the global financial crisis.

After outlining the perilious state of the world economy (for those who haven't noticed), he asked some probing questions, such as how we can know when much debt is too much debt; how we can hope to understand entrepreneurship and its relation to regulation; and how we can stop making "the little guy in America the permanent fall guy." He concluded:

An economic policy rethink won’t be easy. But the first step is to deep-six the hubris. This year should mark the death of all government five-year economic forecasts.

I agree, as I've written before. As Smick stated in the beginning of his piece, a five-month forecast might be reasonably accurate, but a five-year forecast... fuggedaboutit.

But I found this statement from the middle of the piece more intriguing:

So at worst, the field of economics is dying. It is becoming less a science and more an art.

Let's not go that far... yet. Economics is dying only if one conceives of it as a science like physics in the first place. If one doesn't, however, one can see economics emerging from this internal crisis a more holistic, thoughtful—and yes, ethical—discipline.

  • An economics which doesn't purport to understand and model the entire economy in precise quantitative terms (reflecting the hubris Smick decries), but one which uses sound qualitative judgment, based on experience, to move economic indicators by small increments in the desired direction, reflecting improvement in people's lives.
  • An economics that doesn't claim to have "the solution" to a crisis, but has a good idea what to do to get there (in the sense described above).
  • Finally, an economics that will assess its own progress and will admit when the first choice of action has failed and it needs to move to the second one.

If economics were reconceptualized along these lines, it would resemble neither science nor art, but rather practical philosophy—which, after all, is how it all started. While economists trained in the current quantitative, positivistic paradigm would resist it, I believe this approach to economics would recapture people's faith in its predictions and recommendations—in no small part based on its humility rather than hubris.

Sin City, U.S.A.

Jonathan B. Wight

A mirthful study attempts to calculate the top-10 most sinful cities in America.  The Seven Deadly Sins are lust, pride, wrath, envy, greed, gluttony, and sloth, measured carefully by:

  • Strip clubs per capita (Lust)
  • Cosmetic surgeons per capita (Pride)
  • Violent crime per year per 1,000 residents (Wrath)
  • Theft per year per 1,000 residents (Envy)
  • Percentage of disposable income given to charity each year (Greed)
  • Percentage of obese residents (Gluttony)
  • Percentage of physically inactive residents (Sloth)

Okay, all in good fun, but which city comes first?  Is it Las Vegas (no); is it Los Angeles (no); is it New York (no). 

Drum roll….

The Midwestern Catholic city of St. Louis comes in first!  That is followed by family-friendly Walt Disney-themed Orlando!  And third is another bulwark Scandinavian sober town of Minneapolis! 

 [Thanks to Ellis West and Richard Dagger for forwarding this link.]

VRA and DOMA Overturned

Jonathan B. Wight

Yesterday's judicial activism overturned the Voting Rights Act (VRA). Whether you agree or disagree with the facts, one would have to say the Court way overstepped its boundaries on this one. The majority argued that the VRA was a bad law because it used old data. But Congress had just updated the law on the strength of that old data. Why should 5 black robes overrule Congress, which overwhelmingly thought the law served a useful and important public function in protecting basic rights? For a good takedown of the court on this issue, see: http://www.timesdispatch.com/opinion/today-s-top-opinion-judicial-activism/article_c536526e-f05b-508c-8693-7745efca2b26.html

Today the court overturned the Defense of Marriage Act (DOMA). This is a first step in ensuring the basic rights of gays, at least as far as federal spousal benefits and other rights of marriage partners. Much more to be done, state by state.

In Search of True Wealth

Jonathan B. Wight

Ben Campbell, a remarkable economic preacher in Richmond, runs an ecumenical retreat center for reconciliation.  He wrote the wonderful book, Richmond’s Unhealed History and deals with insight about what is required to heal a city and a nation. 

In a recent essay Campbell starts by arguing that American individualism misses the key element of what it takes to make a life of meaning and a society of peace.  Below is a shortened version (the entire essay can be found here).

May 23, 2013 by Ben Campbell

….People search mightily for achievement on their own, making it the first goal, and then are stunned when a lifetime of achievement is still hollow. There is nothing there, no audience, no love, no meaning, no purpose.

Somehow, in the desire to make sure we found ourselves, we lost ourselves. The answer to life’s call is not isolated achievement, but true community; not suppression or exaltation of self but offering of self; not inequality and hierarchy but cooperation and justice.

….It is so hard for persons trapped in the fantasy culture of individualized materialism to hear these words in any way that does not imply some form of self-destruction. It means, they imagine, a lemming-like procession of safe affluent suburbanites hurling themselves off the cliffs of their closeted subdivisions into urban ghettos, third world villages, and dangerous late night street scenes. It means people trapped in poverty being required to stay in poverty, and told it brings them virtue.

Continue reading "In Search of True Wealth" »

"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!)

Paternalism in Packaging

Jonathan B. Wight

A column in today's New York Times argues that public policy should indeed be paternalistic with regard to product packaging. This topic has been covered extensively on this blog (here, here, here, here, and here).

Similar to the "super-sizing" soda law attempted by Mayor Bloomberg, Ezekiel J. Emanuel argues that public policy should ban the super-sizing of over-the-counter drugs associated with accidental overdoses and suicides.

Emanuel argues:

"We need to make it harder to buy pills in bottles of 50 or 100 that can be easily dumped out and swallowed. We should not be selling big bottles of Tylenol and other drugs that are typically implicated in overdoses, like prescription painkillers and Valium-type drugs, called benzodiazepines. Pills should be packaged in blister packs of 16 or 25. Anyone who wanted 50 would have to buy numerous blister packages and sit down and push out the pills one by one. Turns out you really, really have to want to commit suicide to push out 50 pills. And most people are not that committed."

There are interesting issues here that go beyond behavioral economics. People can sometimes act irrationally and not achieve the outcomes they desire. Paternalists would like to help them achieve their goals by forcing them to take an action that produces the result the person intends.

But in this case people who intend to commit suicide want to buy super-sized pill bottles, which is a rational action if that is the goal. Emanuel argues that paternalism is justified in this case because the desire to commit suicide either is transitory or it is weak. People are not committed enough to the goal to do the hard work of breaking apart blister packs. Paternalism in this case raises the time cost of self-destruction. Emanuel reports that:

"In September 1998, Britain changed the packaging for paracetamol, the active ingredient in Tylenol, to require blister packs for packages of 16 pills when sold over the counter in places like convenience stores, and for packages of 32 pills in pharmacies. The result: a study by Oxford University researchers showed that over the subsequent 11 or so years, suicide deaths from Tylenol overdoses declined by 43 percent, and a similar decline was found in accidental deaths from medication poisonings. In addition, there was a 61 percent reduction in liver transplants attributed to Tylenol toxicities."

The Case Against Patents

Jonathan B. Wight

Many economists have an interesting schizophrenia when it comes to patents. Normally, the moral imperative in neoclassical economics is to maximize the economic surplus. But seemingly out of nowhere, most textbooks are perfectly willing to entertain the idea that another kind of moral imperative could suddenly trump efficiency—and that is long run dynamic growth and innovation. Allowing patent monopolies will hurt output and the economic surplus but—the traditional story goes—will create incentives for risk-taking and discovery. Schumpeter's "creative destruction" is widely touted.

But what if the desired dynamism actually results from more competition and less patent monopoly? This is the argument of Boldrin and Levine, writing in the Journal of Economic Perspectives (27/1)(Winter 2013): 3-22. They argue against patents on empirical and theoretical grounds:

The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity, unless productivity is identified with the number of patents awarded—which, as evidence shows, has no correlation with measured productivity. This disconnect is at the root of what is called the "patent puzzle": in spite of the enormous increase in the number of patents and in the strength of their legal protection, the US economy has seen neither a dramatic acceleration in the rate of technological progress nor a major increase in the levels of research and development expenditure.

Both theory and evidence suggest that while patents can have a partial equilibrium effect of improving incentives to invent, the general equilibrium effect on innovation can be negative. The historical and international evidence suggests that while weak patent systems may mildly increase innovation with limited side effects, strong patent systems retard innovation with many negative side effects. More generally, the initial eruption of innovations leading to the creation of a new industry—from chemicals to cars, from radio and television to personal computers and investment banking—is seldom, if ever, born out of patent protection and is instead the fruit of a competitive environment. It is only after the initial stage of rampant growth ends that mature industries turn toward the legal protection of patents, usually because their internal growth potential diminishes and they become more concentrated. These observations, supported by a steadily increasing body of evidence, are consistent with theories of innovation emphasizing competition and first-mover advantage as the main drivers of innovation, and they directly contradict "Schumpeterian" theories postulating that government-granted monopolies are crucial to provide incentives for innovation.

A world without patents seems unimaginable, just as a world of floating exchange rates and an all-volunteer army seemed unthinkable in the mid-1960s when Milton Friedman proposed these. Yet experience has shown that sometimes economists have good ideas for transforming public policy.