Deirdre McCloskey

Consequences of Economic Downturn -- Part I

Martha A. Starr

Thanks, Mark, for your invitation and warm and enthusiastic welcome! And also for your support and persistence in "nudging" us to get this book project done.  ;)

Conseq The central idea of Consequences of Economic Downturn: Beyond the Usual Economics is to discuss issues that usually get left out of discussions of the 2008 financial crisis and the "Great Recession" that accompanied it –- which threw one in 10 members of the labor force out of work. Such discussions usually emphasize specifically economic dimensions of the financial crisis: What role did mortgage securitization play in causing the crisis? Was it Greenspan’s fault for leaving monetary policy too lax for too long? What is wrong with incentive structures in financial institutions and markets that cause people to take on too much risk? Not that these questions are not important, but they’re only part of the picture. A much wider range of factors led to the crisis and downturn -- social, ethical, political, cultural, educational -- and this wider range needs to be discussed if we are to have any hope of bolstering the economic and financial system’s resilience against convulsions like this.

So over the next few weeks, I’m going to lay out some of the core ideas of the book -– beginning today with those of someone whose ideas Mark has already discussed, George DeMartino of the University of Denver, whose book The Economist's Oath: On the Need for and Content of Professional Economic Ethics has attracted attention on a global scale.

George’s chapter addresses the question of whether knowledge practices in economics may have contributed to the crisis and downturn. Unlike just about every other academic profession (statisticians, mathematicians, physicists, sociologists, and more), economists have always resisted adopting a code of conduct or ethical code spelling out how they are expected to act –- as matters of keeping the profession’s members from using their specialized knowledge in ways that could advantage them but harm others, and/or that could cast doubt on the value, integrity and competence of the profession’s work. George doesn’t actually advocate such a code, because he thinks it would oversimplify the thickly tangled ethical questions here. Rather he calls for the establishment of a field of professional economic ethics which, like the field of medical ethics, would seriously study how economists should tackle specific problems that come up in the course of their work.

Important here, for example, is the principle widely found across the professions that people should avoid courses of action that could do harm to others (like the physician’s oath). George argues that reasonable concern for the wellbeing of others –- especially vulnerable groups lacking the wherewithal to deal with a period of significant economic and financial distress -- would have impelled economists to think more squarely about the risks inherent in the constellation of developments in the years before the financial crisis (the housing price bubble, rise of subprime lending, proliferation of collateralized debt obligations, and so forth). This, in turn, would have clarified their social responsibility to try to stop practices that were contributing to these risks, and/or advocate policies that would tamp them down.

Personally, I think the economics profession does need a code of ethics because, as Deirdre McCloskey says, “words matter,” and a well-done code could go a long way towards making people think twice before (say) taking $135,000 speaker's fees from Goldman Sachs, then giving them privileged access to the White House. But George’s argument against oversimplifying is powerful and thought-provoking.

Up next: Robert Prasch’s chapter on policies and institutions that shift risk away from wealthy and powerful institutions onto folks like average taxpayers.

The Ethics of Professional Economic Practice (at the 2011 ASSA Meetings in Denver)

Mark D. White

Demartino I returned from Denver yesterday after a very enjoyable and interesting ASSA meeting, which culminated (for me, at least) with "The Ethics of Professional Economic Practice," a panel discussion on Sunday morning featuring Dean Baker (Center for Economic and Policy Research), David Colander (Middlebury College), George DeMartino (University of Denver), and Deirdre McCloskey (University of Illinois-Chicago). As mentioned here previously, this session was inspired by George DeMartino's new book, The Economist's Oath: On the Need for and Content of Professional Economic Ethics, the recent movie Inside Job (discussed here previously by Jonathan), and, more broadly, the Association for Integrity and Responsible Leadership in Economics and Associated Professions (AIRLEAP).

While Dr. Baker focused on accountability of economists working for international financial institutions such as the IMF and World Bank, the other three speakers debated about codes or standards of ethical conduct for economists more generally, including academic economists in advisory positions to corporations or government as well as those involved in "basic research" who consider themselves removed from any use made of their models (but who, according to the panel, are nonetheless responsible for the way their work is put into practice by others).

The most interesting aspect of the discussion to me was the debate over whether there should be an explicit code of ethics (including official enforcement and sanctions) or a loose ethical standard or statement (with voluntary compliance or nonofficial sanctions). Professors DeMartino and McCloskey endorsed the former, while Professor Colander was more skeptical, citing the myriad problems and costs with enforcing a formal code of ethics. (UPDATE: It was pointed out to me, correctly, that I was grossly oversimplifying the speakers' positions here, so please disregard the last sentence.)

One way to look at this issue is by using legal philosopher H.L.A. Hart's distinction between internal and external points of view with respect to the law (that he outlines in The Concept of Law, especially pages 82-91). A person who takes the external view to the law (especially relevant to the criminal law) treats its prohibitions merely as threats backed by sanctions (as John Austin regarded them, and against whom Hart is arguing in the early chapters of his book). Such a person will take any chance he or she has to cheat the system (as would the typical homo economicus of neoclassical economics--particularly neoclassical law and economics, as Robert Cooter discusses here). 

But a person who takes the internal view imbibes the law with normative force: he or she believes in the law and its purpose (even if not believing in every individual law itself). This person will obey the law even when enforcement is weak or nonexistent because he or she feels a part of the legal system, a beneficary of it, rather than an outsider merely playing by the rules when it serves his or her purposes. Hart uses this distinction to make many points throughout the book (such as the incompleteness of Austin's "command theory of law," the shortcoming of predictive theories of law, and the efficacy of international law in the absence of official enforcement or sanctions), but the one on which I rely here is that a prosperous society needs most of its members to hold an internal view to the law, lest the costs of enforcement with a large number of citizens holding the external point of view will be crippling.

This bears on the debate held in the session: if a code of ethics is imposed, but the majority of professional economists do not believe in it or do not take it to heart (holding an external point of view), it will have to be strongly enforced, its effectiveness will be reduced (given the costs of enforcement), and resources will be devoted to finding ways around any code of ethics rather than to doing good work within it. This is the typical response to rules and regulations that seem to be imposed with no normative justification, such as tax provisions and speed limits: many of us resent them and often break or cheat them with impunity, which we would more less often do with laws prohibiting murder and theft. But if the majority of professional economists believe in the importance of ethical behavior (holding an internal point of view), then a formal list of rules is not necessary; moral and social pressure within themselves and the academic community will suffice.

So, following Hart's insight, a formal code of ethics will be neither effective nor efficient if it has to be enforced constantly and consistently. And if we find that it does need to be enforced this strongly, it is a sign that as a community we are in even worse shape than we think, since it would imply that many of us do not believe in the importance of ethical behavior. Such a formal code may even be counterproductive, substituting extrinsic motivation for intrinsic motivation (in the spirit of Bruno Frey's work). But if we believe that most economists are basically good, decent (if imperfect) people, then an ethical standard, a set of principles that should be followed, may be enough to guide us when we stray without driving more of us to bend rules that seem to be imposed from outside or above.

George DeMartino and an economists' code of ethics in New York Times

Mark D. White

Demartino Thanks to future guest blogger Martha Starr, I can share with you an article from a recent New York Times on George DeMartino, author of the forthcoming book The Economist's Oath: On the Need for and Content of Professional Economic Ethics, who is pushing strongly for a code of ethics for economists, an idea which has gained tremendous popularity of late with the release of the movie Inside Job, discussed here previously by Jonathan. (George also contributed a chapter to Martha's forthcoming edited volume in the Perspectives from Social Economics series from Palgrave, Consequences of Economic Downturn: Beyond the Usual Economics.)

It bears repeating (from an earlier post) that George will also speak on a panel on professional ethics at the ASSA meetings in his hometown of Denver later this week:

Sunday, January 09, 2011, 10:15 am, Hyatt Regency, Capitol 5
Association for Social Economics/American Economic Association
The Ethics of Professional Economic Practice (Panel Discussion)
Dean Baker (Center for Economic and Policy Research), "Applying Economics to Economists: Good Governance at the International Financial Institutions"
David Colander (Middlebury College), "A Three-Word Ethical Code for Economists"
George DeMartino (University of Denver), "The Economist's Oath: On the Need for and Content of Professional Economic Ethics"
Deirdre McCloskey (University of Illinois-Chicago), "Humanomics: Taking All the Virtues (and Vices) Seriously"

Needed: An Economics for Grownups (Interview with Deirdre McCloskey at National Review)

Mark D. White

There is a terrific interview at National Review with Deirdre McCloskey regarding her new book, Bourgeois Dignity (and her previous one, The Bourgeois Virtues). My favorite part is when the interviewer asks her, "What should young people who want to study economics your way, your 'humanistic science of economics,' do?" (Emphasis mine.)

In college you got the claim that Greed is Good, and anyway people are Max U sociopaths, regardless of what all the scientific evidence gathered on the point says to the contrary. I would advise them, of course, to read my book How to Be Human*: *Though an Economist, which is advice to young economists about maintaining morale and integrity — and getting the scientific task done while retaining common sense. Beyond that, Educate thyself. Read widely, having acquired somewhere a deep knowledge of an economics of some sort. We have enough amoral idiot savants in the study of the economy. We need some fully educated humans. We need a humanomics, not more freakonomics.


2011 ASSA Meetings: Economics and religion sessions

Mark D. White

Going through the preliminary program for the upcoming Allied Social Science Association meetings in Denver in early January, I decided to highlight sessions that I found interesting for one reason or another. (See this previous post for sessions that focus on economics and ethics.)

Below the fold are several sessions that touch on economics and religion (as before, I've omitted the names of chairs and discussants, which can found on the program):

Continue reading "2011 ASSA Meetings: Economics and religion sessions" »

2011 ASSA Meetings: Ethics and economics sessions

Mark D. White

I went through the preliminary program for the upcoming Allied Social Science Association meetings in Denver in early January, and I thought I'd highlight sessions that I found interesting for one reason or another.

Below the fold are several sessions that touch on ethical aspects of economics (I omitted the names of chairs and discussants, which can found on the program):

Continue reading "2011 ASSA Meetings: Ethics and economics sessions" »

Horwitz on the Private Sector Response to Hurricane Katrina and the Bourgeois Virtues (from Accepting the Invisible Hand)

Mark D. White

We finish our previews of the chapters from Accepting the Invisible Hand: Market-Based Approaches to Social-Economic Problems with Steven Horwitz's "Doing the Right Thing: The Private Sector Response to Hurricane Katrina as a Case Study in the Bourgeois Virtues." Against the background of Deirdre McCloskey's The Bourgeois Virtues (see also here), Horwitz details the extensive assistance granted by private firms like Wal-Mart, Home Depot, and McDonald's to the regions devastated by Katrina, and argues that the profit motive fails to explain it.

Major American companies from Marriott to McDonald’s to Wal-Mart undertook major and minor acts of bourgeois virtue, and contributed in a significant way to the recovery from the hurricane. Managers and senior leaders used the language of ethics and virtue, rather than that of narrow self-interest or profit maximization, in describing what they expected from employees, and employees used similar language to describe their own behavior. “Doing the right thing” was central to their response. What constituted doing the right thing, how the very nature of large capitalist enterprises made doing “right” possible, and how doing right improved conditions after Katrina will all be explored here. (p. 170)

Horwitz provides a wealth of evidence from news reports and interviews supporting his contention that these corporate agents, at the corporate level and throguh their regional branches and managers, were acting not out of calculated self-interest but a larger sense of duty, beneficence, or "the right thing":

Wal-Mart’s reputation is one that would not suggest that ethics and virtue were at the top of their priority list. However, then-CEO Lee Scott’s directive to all of Wal-Mart’s senior vice presidents is perhaps the most clear statement of the insufficiency of Prudence Only. In a meeting with those executives, he asked them to pass the following message down to their reports and get the word out to managers and associates across the country: “A lot of you are going to have to make decisions above your level. Make the best decision that you can with the information that’s available to you at the time, and, above all, do the right thing.” Of course this directive leaves open the question of what Scott considered the “right things” to do, but it became clear in the way the corporation praised various responses of individual managers and associates during the storm (to be discussed later) that he, like the leaders at McDonald’s, was concerned that people and communities be taken care of before anyone worried about profits. (p. 176)

Later in the chapter, Horwitz discusses the broader importance of private concerns like Wal-Mart and McDonald's (as well as individual grocers, builder, etc.) to communities, and emphasizes that the contribution they make to ravaged areas like those hit by Katrina are long-lasting and much broader than simply jobs and income (citing Virgil Storr's seminal work on the market as a social space):

Markets in commercial societies are much more than the sterile interplay of atomistic maximizers that constitutes the models of mainstream economics. In the flesh-and-blood world of the real marketplace, people come together in a variety of ways and for a variety of purposes. Much thinking about the liberal order has focused on the polity as the site of this sort of coming together, but the agora is also full of sites in which social interaction is central. ... Moreover, the fact that buying and selling is part of our everyday routine, whereas political action, even construed broadly, is much more the exception, means that the marketplace is far more likely to be a site of social intercourse and interaction than are the institutions of the polity. (pp. 185-6)

Bourgeois Dignity and Humanistic Economics

Jonathan B. Wight

 You don’t have to wait to get Deirdre McCloskey’s new book, Bourgeois Dignity (2010) to get a strong taste of what’s inside. 

 Found here is a short summary that McCloskey provided last month for Cato Unbound.  The key message is one Keynes would find understandable: namely, that ideas and beliefs are the most important commodities of value, and explain economic success or stagnation.

 While markets give rise to a higher material standard of living, McCloskey attacks economists for adopting a materialist viewpoint.  In the Cato Unbound post, McCloskey calls for the creation of a new science of humanistic economics:

We will need to abandon the materialist premise that reshuffling and efficiency, or an exploitation of the poor, made the modern world. And we will need to make a new science of history and the economy, a humanistic one that acknowledges number and word, interest and rhetoric, behavior and meaning.

 Deirdre’s use of “humanistic” is likely to arouse ire, since “humanistic” economics is associated with E F Schumacher’s Buddhist economics of limited wants (Small is Beautiful: Economics as if People Mattered).  It also is a title by Mark Lutz and Kenneth Lux, Challenge of Humanistic Economics (1979) that develops somewhat similar ideas to McCloskey on the role of a non-materialist approach to economics.

 I think that McCloskey has it exactly right:  to defend capitalism we need to see competitive markets as providing an opportunity for humanistic development in its broadest sense—for self expression, for personal growth, for meaning, and for community connectivity.  The fact that markets also generate higher material standards is quite amazing—but an exclusive focus on this aspect can lead to unfortunate dead ends. 

 What drives entrepreneurship—and what supports its existence among the populace—is something far grander and ennobling than economic efficiency: it is dreams of discovery and the desire for beauty in order.  Not surprisingly(!), this topic is covered by Adam Smith in TMS (IV 1). 

McCloskey on Why "Life in the Market Is Good for You" (from Accepting the Invisible Hand)

Mark D. White

As we approach the climactic finish of our chapter-by-chapter preview of Accepting the Invisible Hand: Market-Based Approaches to Social-Economic Problems (now available), we come to Chapter 7 by Deirdre McCloskey titled "Life in the Market Is Good for You." (You can use the following links to find previews of the chapters by White, Meadowcroft, Gwartney and Connors, Baker, Blevins, Ramirez and Wight, and Garnett, as well as the book's preface.)

Adapted from her landmark book The Bourgeois Virtues, McCloskey's chapter discusses common misperceptions about the propriety of market work, in particular trade but also "menial" labor, and how intellectuals throughout the ages have dismissed its importance to the good life. Of course, throughout the chapter she references literature, poetry, theatre and film, as well as economists, philosophers, theologians, and more.

It is difficult to pick out a passage to quote, but here's one of my favorites:

Chaplin’s 1936 movie Modern Times or the opening scenes of Sillitoe’s angry-young-man novel The Loneliness of the Long Distance Runner (1959; movie 1962) say that many factory jobs are monotonous. Granted. I have not worked in a factory. But the monotony is of course pretty common in nonindustrial society, too. Planting rice is never fun. The idiocy of rural life is not always better for the soul than the idiocy of urban life. I have worked as a farm laborer. Ironically, only since Romanticism and the rise of prosperous, healthy cities—London stopped killing more people than it bred by the end of the eighteenth century—have Europeans looked fondly back on their village roots. (p. 160)

(And I'll always thank her for teaching me, in The Bourgeois Virtues, how to pronounce Mihaly Csikszentmihalyi, the author of Flow: The Psychology of Optimal Experience, another highly recommended book - see p. 156 for that!)

BD And I would be remiss if I didn't mention McCloskey's new book, published this month by Chicago, titled Bourgeois Dignity: Why Economics Can't Explain the Modern World. I expect it to be as rewarding and deeply pelasurable as was The Bourgois Virtues, and I hope discussion of it will be forthcoming on this blog (hint, hint).