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.

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!)

Mark D. White

Thanks to the indispensable Heterodox Economics Newsletter (latest issue here), here are two recent book reviews that may interest our readers, both from the latest issue of the Erasmus Journal for Philosophy and Economics (6/1, Spring 2013). [In the interest of full disclosure I must note that I blurbed the first book and the second was published in my "Perspectives in Social Economics" series from Palgrave Macmillan.]

Economics as Applied Ethics: Value Judgements in Welfare Economics, by Wilfred Beckerman (Palgrave Macmillan, 2011), was reviewed by our own Jonathan B. Wight, who finds it "a well-written textbook geared to advanced undergraduate or graduate students of economics, many of whom are largely and regrettably innocent of the ethical problems inherent in conventional economic analysis." After a detailed critical breakdown by chapter, Wight concludes that:

Overall, this book is highly recommended. It covers the selected topics with depth and sensitivity. The writing is generally excellent, but there are occasions of repetition and unevenness, as if the chapters were compiled separately and merged later. A student reader who is not already familiar with basic ethical theories could benefit from a primer in some places. For example, the book discusses Amartya Sen’s theory of commitment, however it does not dig very deeply to explain or defend that notion, whether from a deontological or virtue ethics approach.

The book devotes a lot of attention to questions of equality and justice, particularly on the work of economist philosophers such as John Broome, Partha Dasgupta, Ian Little, and Amartya Sen. This is
appropriate, interesting, and relevant. However, the book does not appear to address research in experimental economics, biology, and psychology that might be relevant to some of these questions, such as the work in neuroeconomics by Paul Zak, experimental work by Vernon Smith, or recent philosophical work on virtue ethics by Deirdre McCloskey. This is the normal limitation of any text that strives to be concise, yet students should understand there is much more to ethics and economics than can be conveyed in this book.

Approximating Prudence: Aristotelian Practical Wisdom and Economic Models of Choice, by Andrew Yuengert (Palgrave Macmillan, 2012), was reviewed by Ricardo F. Crespo. According to Crespo, 

Yuengert shows in this book that economic modeling undertakes only a partial analysis of economic action, because it ‘puts away’ interesting features of its subject that deserve to be taken into account. He proposes adopting the Aristotelian account of human action—more specifically, of practical wisdom—as the benchmark against which to consider economic modeling. He maintains that “economics can learn much about its limits from Aristotle, who describes aspects of choice behavior that cannot be precisely modeled” (p. 3). Thus, the aim of the book is to determine what aspects of human behavior cannot be captured by the economists’ models.

After a careful analysis of the book's structure and arguments, Crespo concludes that it

provides the useful service of identifying the characteristics of human action that economic models cannot take into account. It is useful because it explains the challenge to positive economists of trying to incorporate these characteristics into their approach, and because it highlights the features that economists must consider in their normative work. The contribution of the book lies in its originality. Economics books are not usually about what economics cannot do.

Both the author and the reviewer are Aristotelian economists, and readers benefit greatly from Crespo's detailed analysis of Yuengert's use of concepts such as eudaimonia  and contingency (the latter is comparison to Knightian uncertainty). (See Crespo's Academia.edu page for his own work on Aristotle and economics.)

Jonathan B. Wight

UVA Board rector Helen Dragas is at it again. You may recall that Dragas fired UVA president Teresa Sullivan last June, without cause or due process (see also here and here). A faculty/student uprising led to Sullivan's reinstatement, with promises by Dragas of playing nice in the sandbox.

But Dragas apparently cannot control her need to micro-manage, according to The Washington Post. A few weeks ago Dragas gave Sullivan 65 goals to implement this year—when there are just a few months left in the semester. Dragas stated: "U-Va. is a public institution. It's not an academic playground, and we have to make some difficult decisions."

No one should think UVA is perfect, or even close to it. A great university is like an ocean liner that changes course over many miles; Dragas is like the captain of a PT boat, zipping in circles around the ocean liner, yelling "Follow me! I said! Follow me right now or you're fired!"

This is so condescending it borders on outrageous. More important, it is dangerously ignorant of the moral norms that have guided higher education and contributed to America's economic flourishing.

Successful businesspeople (of which Dragas is one) populate the boards of higher education. But business and academia operate along different ethical norms—for very good reasons. This is beautifully brought out in Reason Magazine's interview with Paul Romer, one of the architects of "new growth theory." Romer notes that

Jonathan B. Wight

What is the future of economics? Barry Eichengreen posted his ideas in "Our Children's Economics" in The Economist.

According to one view, the economics of 2030 will have marginal improvements, adding a bit of behavioral economics here, a spice of institutional theory there, perhaps even a re-writing of Adam Smith's ethics and a reinterpretation of the invisible hand that is not based on greed.

Eichengreen argues that the marginalist view is likely wrong. We are heading for major rifts and breakthroughs, similarly to the Keynesian revolution of the 1930s. What these are he cannot say.

My own pet theory is that economics will merge with biology to make BIO-ECONOMICS. Both fields try to understand survival and procreation in particular habitats with innovation and adaptation to changing environments.

Eichengreen notes that the mechanism by which knowledge is transferred from generation to generation will radically change. The old model is of a great authority who writes a definitive textbook that lasts for a generation: think of Smith and Wealth of Nations in late 18th century, Ricardo and his Principles in the 19th century, Marshall's great fusion at the end of the 19th and early 20th century, and Samuelson's great synthesis of Keynesian economics in the 1950s and on.

In the future, Eichengreen argues that textbooks will no longer be written by big-name authors, but through a wiki-process, electronically built from the bottom up. The result will be different to be sure:

"The outcome will be messy. But the economics profession will also become more diverse and dynamic – and our children's economics will be healthier as a result."

[Thanks to Pam Thomas for this link.]

Mark D. White

The good people at Routledge have posted an extensive Q&A with Julian Reiss, Professor of Philosophy at Durham University, regarding his forthcoming book Philosophy of Economics: A Contemporary Introduction. From the lead-in:

Philosophers since Aristotle have asked questions and offered opinions about economics, broadly defined. But during the 20th century economics developed into a field which was, as Julian points out in the beginning of his upcoming work, “hostile to philosophical reflection.” Economics became a science: economists began to see in “the economy” a space made up of empirically observable facts interpretable by the assumptions, methods, and models familiar to students enrolled in Econ 101 classes. In recent years, though, certain economic realities—the financial crisis, e.g.—have challenged those assumptions, methods, and models. A writer for the Economist described the consequence of recent challenges to the science of economics: “OF ALL the economic bubbles that have been pricked [since 2008], few have burst more spectacularly than the reputation of economics itself.”

Julian’s book introduces readers to the field in which many of those challenges are now being articulated. Questions of ethics, of the nature of human rationality when faced with economic decision-making, of the verifiability of economic models—these questions and more are all now being asked anew about economic practices and decisions. This interview hopes to open those questions to all curious readers.

Read the entire interview here.

Mark D. White

Kevin Drum at Mother Jones recently highlighted a new paper by Kimmo Eriksson (Mälardalen University and Stockholm University) published in Judgment and Decision Making titled "The Nonsense Math Effect" (7/6, November 2012). Here's the abstract:

Mathematics is a fundamental tool of research. Although potentially applicable in every discipline, the amount of training in mathematics that students typically receive varies greatly between different disciplines. In those disciplines where most researchers do not master mathematics, the use of mathematics may be held in too much awe. To demonstrate this I conducted an online experiment with 200 participants, all of which had experience of reading research reports and a postgraduate degree (in any subject). Participants were presented with the abstracts from two published papers (one in evolutionary anthropology and one in sociology). Based on these abstracts, participants were asked to judge the quality of the research. Either one or the other of the two abstracts was manipulated through the inclusion of an extra sentence taken from a completely unrelated paper and presenting an equation that made no sense in the context. The abstract that included the meaningless mathematics tended to be judged of higher quality. However, this "nonsense math effect" was not found among participants with degrees in mathematics, science, technology or medicine.

It's a short paper and well worth the quick read (or read Drum's post, which summarizes it well). Eriksson reports that humanities/social science readers tended to be enchanted by the irrelevant equations, with 60-65% rating the adulterated abstract higher, but economists are not broken out of that very broadly defined group (which only includes 84 people as it is). Given some (most?) economists' predilection for mathyness, though, I would not be surprised at some degree of unconscious bias for research that promises greater mathematical sophistication (though I assume any such bias would melt away once the paper was read).

But I think many other economists, especially heterodox economists who are more skeptical about the benefits of mathematical modeling, might go the other way. I know that when I read an interesting abstract and then skim the paper, my eyes glaze over when I hit math--not because it doesn't add anything to support the author's thesis but because I'm afraid it will leave out many things in the interest of abstraction and simplicity, such the very nonquantitative aspects of the model that I found fascinating in the first place! Some things must be left out of a model, of course, but these factors should be omitted because they are relatively unimportant, not because they're don't fit into the modeling framework.

As Eriksson writes in his introduction to the paper,

In areas like sociology or evolutionary anthropology I found mathematics often to be used in ways that from my viewpoint were illegitimate, such as to make a point that would better be made with only simple logic, or to uncritically take properties of a mathematical model to be properties of the real world, or to include mathematics to make a paper look more impressive.

He very well could have included economics in there as well--I'm curious if his exclusion of it was intentional or random. Gee, I'll bet we could model that...

Mark D. White

Yesterday, Kevin Drum at Mother Jones spoke up for social science following an editorial in Nature arguing against the NSF's proposed defunding of research in political science. Here's a bit of the op-ed:

Part of the blame must lie with the practice of labelling the social sciences as soft, which too readily translates as meaning woolly or soft-headed. Because they deal with systems that are highly complex, adaptive and not rigorously rule-bound, the social sciences are among the most difficult of disciplines, both methodologically and intellectually. They suffer because their findings do sometimes seem obvious. Yet, equally, the common-sense answer can prove to be false when subjected to scrutiny. There are countless examples of this, from economics to traffic planning. This is one reason that the social sciences probably unnerve some politicians, some of whom are used to making decisions based not on evidence but on intuition, wishful thinking and with an eye on the polls.

...As Washington Post columnist Charles Lane wrote in a recent article that called for the NSF not to fund any social science: “The 'larger' the social or political issue, the more difficult it is to illuminate definitively through the methods of 'hard science'.”

In part, this just restates the fact that political science is difficult. To conclude that hard problems are better solved by not studying them is ludicrous. Should we slash the physics budget if the problems of dark-matter and dark-energy are not solved? Lane's statement falls for the very myth it wants to attack: that political science is ruled, like physics, by precise, unique, universal rules.

And here's some of what Mr. Drum added to it:

The public commonly thinks of disciplines like physics and chemistry as hard because they rely so heavily on difficult mathematics. In fact, that's exactly what makes them easy. It's what Eugene Wigner famously called the "unreasonable effectiveness" of math in the natural sciences: the fact that, for reasons we don't understand, the natural world really does seem to operate according to strict mathematical laws. Those laws may be hard to figure out, but they aren't impossible. ...

Hari Seldon notwithstanding, the social sciences have no such luck. Human communities don't obey simple mathematical laws, though they sometimes come tantalizingly close in certain narrow ways — close enough, anyway, to provide the intermittent reinforcement necessary to keep social scientists thinking that the real answer is just around the next corner. And once in a while it is. But most of the time it's not. It's decades of hard work away. Because, unlike, physics, the social sciences are hard.

Bonus points for the Foundation mention!

(I don't have much to add; I made a similar point in this post, comparing the complexity of marcoeconomic forecasting models to meteorological weather-forecasting models.)

Jonathan B. Wight

Governor McDonnell has reappointed Helen Dragas to the Board of Visitors at UVA.

This shows that if you muck things up sufficiently, you will be rewarded. The Peter Principle has been verified.

Dragas' claim to fame is that she engineered a coup (with questionable due process) against a sitting president who had committed no malfeasance. The president's only non-action was to not jump to adopt Dragas' goofy scheme to turn UVA into a University of Phoenix satellite campus. For a slightly opposing view, see Jim Bacon.

I am amazed at the resilience of Teresa Sullivan, UVA's re-anointed president, who claims she can work with Dragas. That's very much like Ceasar saying he can work with Brutus. That's a lot of forgiveness, but can there be trust?

Politically, the reappointment of Dragas lets Senate-candidate Democrat Tim Kaine off the hook, since he initially appointed Dragas and might have taken heat from Senate-candidate Republican George Allen.

Through this reappointment McDonnell signals to his conservative base that he isn't kowtowing to those damn whiny professors, who are all liberals anyway and who he thinks must stand in the way of market-driven reforms in academia. It also signals his support toward business interests, who largely run the board.

I once felt very strongly that many research universities were wasteful because so many resources go into producing research that may have little value to society. I still feel somewhat that way. Do we really need state-supported PhD programs that rank in the bottom 100? Let's get rid of weak researchers and hire faculty for their teaching abilities.

My views today are somewhat different. Not all researchers are good teachers, and research often does take away from teaching. But being a good teacher means being actively engaged in one's profession that is rapidly evolving. There is no way to do that without attending conferences and reading journals. And even better is going head-to-head by submitting your own papers for publication and critical review. All of that is a huge time commitment.

The rising cost of higher education is typically not the result of lazy faculty. Administrative programs pop up like mushrooms in the forest. Part of this is the bureaucracy assembled to ensure accountability and assessment needed for accreditation—killing forests for paper and taking up huge amounts of faculty time.

The most egregious aspect of rising higher education expenses is the very aspect that conservatives extoll—the market! Yes, in a market-driven world, schools compete for the best students by building fancy recreation centers, elaborate dining halls, and so on. That's the consumer asking for amenities, and universities obliging. Just as it nearly impossible today to buy a plain-vanilla Dodge Dart, early 1960s-style (photo), that gets you from point A to B without fuss or style, it is nearly impossible to find an accredited university without the bells and whistles.

Before you complain, remember that this has been market-driven. The reason schools raised tuition rapidly after the 1990s is because demand rose. Prices rise when consumers signal a greater willingness to buy. That's what happened over the last 20 years with a demographic surge of high school seniors combined with growing real income and assets. Otherwise intelligent people seem baffled by the rising tuition, acting as if it resulted from a grand conspiracy of faculty members. It's just the market!

That bubble is now bursting, and many universities are retrenching. But will business-driven boards get rid of the consumer luxuries and amenities or begin disassembling the liberal arts, one discipline at a time?

Jonathan B. Wight

In a month the American Economic Association will implement its new financial disclosure requirement for authors:

Beginning July 1, 2012, all submissions to AEA journals, including revisions of previously submitted papers, must be accompanied by a Disclosure Statement. This is applicable even when the authors have no relevant interests to disclose. Authors will need to provide a separate Disclosure Statement for each coauthor at the time of submission. Submissions that do not include the statements will be considered incomplete and will not be reviewed. Please see the complete Disclosure Policy at http://www.aeaweb.org/aea_journals/AEA_Disclosure_Policy.pdf

This is a good start. Next on the agenda, in a few years, will be a code of ethics.

While economists maintain that there is no enforcement mechanism for a code, having an explicit norm sets the expectations and influences behavior.

Passing a code is one thing—but teachers and mentors will need to embrace it. A code that is ridiculed would be worse than no code at all. Hence, major figures from various schools will need to support it publicly.

Sadly, this likely won't happen until another—larger—scandal engulfs us.