Posts by Irene van Staveren

Economics After the Crisis

Irene van Staveren

Irene bookA year after the fall of Lehman Brothers, The Economist's headline proclaimed the end of modern economics. What has happened since? Well... almost nothing.

Mainstream and near-mainstream economic textbooks still sell like before. And INET has supported some initiatives that eliminate the rough sides of neoclassical thought and neoliberal policy advice. Very laudable initiatives, with, for example, Wendy Carlin's work on developing a new undergraduate curriculum CORE. But students of economics are not satisfied with these minor changes, so many years after the start of the financial crisis. Their Rethink Economics petition demands more fundamental changes to textbooks.

As a supporter of every single petition, pamphlet, op-ed, and plea for pluralism in economics before and after the crisis, I decided three years ago that I should practice what I preach. The result is Economics after the Crisis, a pluralist introductory textbook published by Routledge in January 2015. It offers a tool to understand the basics of economics from four theoretical perspectives either for use in the classroom or for self-study alongside a standard course book. The theories are presented in every chapter, micro and macro. And from interdisciplinary and close to real-world experiences to mathematically in an idealized world of perfect markets and agents following the single ethical guide of utility maximization. The book presents social economics, institutional economics, post Keynesian economics, and neoclassical economics and thereby shows that almost no economic concept or tool is theory-neutral. If only this message gets across, the book will have accomplished already more than I could hope for.

The window of opportunity to reform economic teaching is almost shut. Banks pass stress tests in Europe and the US while still being too big to fail. Nobel Prizes are awarded to economists who show no effort at all in rethinking economics. And economic policies ignore the danger of continuously increasing private and public debt, while shifting the consequences of such myopia on disadvantaged groups and whole populations.

If it is not now, we may have to wait for the next crisis to change economic thinking and teaching. I truly hope that the combined efforts of critical economists, activist students, and courageous teachers will help to make the change. We cannot afford to standby any longer.

Book review: Inequality, Development, and Growth (Routledge, 2011)

Irene van Staveren

Idg Review of Inequality, Development, and Growth, edited by Günseli Berik, Yana van der Meulen Rogers, and Stephanie Seguino. London: Routledge, 2011, 361 pp. ISBN13: 978-0-415-59944-3 (hbk), ISBN13: 978-0-415-60994-4 (pbk).

This volume is a flagship for feminist macroeconomics and was first published as a special issue of the journal Feminist Economics in 2009. Its major contribution to the study of inequality and growth is that it follows a two-sided approach to the relationship between these two phenomena. The book examines not only the effect of macroeconomic policies and economic growth on inequalities but also as the effects of inequality on growth. The volume presents a wide diversity of theories, methods, country studies and levels of integration by an equally wide diversity of authors, male and female, and from the developed as well as the developing world.

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The ethical dimensions of the financial crisis and rationality – by Ricardo Crespo and Irene van Staveren

The meaning of the term “crisis” in the economic literature is not without ambiguity. As a general feature, macroeconomic crises are events marked by “broken promises” that shatter the expectations that many agents had entertained about their economic prospects and wealth positions. The large change in the economic (and possibly also, social and political) environment naturally leads to reappraisals of the views of the world upon which agents had based their expectations, plans and decisions, and to a reconsideration of theories and models on the part of analysts. Crises are “memorable” events with potentially long-lasting consequences on attitudes and beliefs. They require a reinterpretation of past experiences and a re-statement of propositions concerning the way in which the relevant systems are assumed to work.

                Concern for the study and the understanding of crises is actually older than macroeconomics as an established discipline and it has operated historically as a strong motivation to investigate in the field. Modern macroeconomic theory, on its side, has increasingly become committed to a set of analytical and procedural presumptions, which lead to look for representations of macroeconomic behavior as the result of well coordinated (except for some noise which acts as an additional constraint) optimal decisions of agents, equipped with rational expectations, that is with knowledge of the probability distributions relevant for their plans. These research criteria, sometimes elevated to the rank of methodological prescriptions, can be seen as the outcome of past debates on the theory of macroeconomic fluctuations and inflation, which generated dissatisfaction with earlier theories. At the same time, their application to the study of crises, as if they could claim a universal range of validity, has been subject to paradoxes and problems in the interpretation of salient facts, which seem to call for new searches. The crisis has been the acid proof leading to discard these theories. If the expectations were rational we would not have had a crisis. Then, the analysts begin to discern other kinds of reasons embedded in the process:

                (i) An excessive liberalization of the banking rules and the financial sector regulation (lower capital requirements, no limits to joint ventures and mergers and acquisitions leading to banks with extremely large assets on their balance sheets) facilitate irresponsible loans, mortgages and investments.

                (ii) The Central Banks’ controls fail, partly due to lack of knowledge of new financial products (securities), partly due to limited international cooperation, and partly due to too close connections with banks.

(iii) The provision of wrong incentives through disproportionately high bonuses to bankers, traders and managers of the financial sector based on short run profits, ignoring high risk and long run viability of financial institutions, clients, and whole economies; as well as through golden handshakes even in cases of bad performance.

                (iv) The moral hazard role of government which tends to save big banks and firms because they are too big to let them fall: bankers and entrepreneurs know this and they therefore take excessive risks.

                (v) Technical problems such as difficulties in understanding the technicalities of mortgages operations, or systems of financial evaluations.

                (vi) A tendency to hide risky positions in the accounting proceedings. This, for example, was the case for Lehman Brothers, which was factually bankrupt half a year before its fall, thanks to accounting tricks.

                (vii) Failing rating agencies that provided too rosy assessments of banks.

                (viii) A monetary and fiscal policy that foster consumerism through low interest rates and taxes, in particular for the rich. For some analysts the monetary excess is the main cause of the crisis, leading to over-liquidity, while others emphasize how more inequality in income distribution was driving the over-liquidity.

                This list entails reasons that are beyond narrow economic rationality: within them we can find psychological, sociological and moral reasons. According to Max Weber’s classical classification, we can distinguish four types of rationalities guiding social actions: instrumental, value-rational, affective and traditional. Instrumentally rational is the action aiming at allocating means for the attainment of the actor’s ends. When this allocation is the best possible we have a specific kind of it: maximizing instrumental rationality. Value-rational actions are determined by conscious beliefs in the intrinsic value of some behaviour: they follow moral criteria. Affective are the actions guided by the actor’s affects and feelings, i.e., psychological springs. Traditional actions are determined by ingrained habituation, by mainly sociological reasons. Economic rationality is an instrumental maximizing rationality. However, Weber argued that, although one specific form of rationality might prevail in a specific action, rather all human actions are oriented by various types of rationality. This is thus the case of economic actions and instrumental maximizing rationality: this rationality prevails in economic events, but it often goes jointly with other forms of rationality. As all social phenomena, economic phenomena are complex and we may analyze them from all four Weber’s perspectives of rationality: instrumental, moral, psychological, and sociological.

                We can detect the presence of these rationalities in phenomena by the ordinary discourse used to describe them. Descriptions are rarely pure descriptions. They frequently bear connotations going beyond mere description. We can find some of these connotations in the list of reasons for the crisis. Although we are not able to evaluate the exact impact of the moral aspects of the crisis it seems that many moral terms are intermingled in the list.

                In effect, the list includes terms with moral resonances. For example, “to hide risky situations”, “excessive liberalization”, “extremely high bonuses”, “irresponsible loans.”” failing control”,  “wrong incentives” , “moral hazard”, “too rosy assessments” and “consumerism” add  qualifications to the economic facts including but also going beyond economic analysis.  It was remarked that during the crisis, we had cases of fraud or greed; but most often, we have had laziness, a tendency to close the eyes when performing risky actions and to irresponsibly go on without reflection when something wrong was hinted. It is clear that in this crisis there was much mediocrity, work badly done, disregard for others, and complicity with egoist or pragmatic concerns. Moral decline influences people’s psychology: when the crisis was triggered, partially due to inadequate ethical conduct, people lost trust in the economic sector’s modes of operating and its financial systems.

                Economic rationality only considers the best way of achieving preferences, regardless of their specific content. The characteristics of the conducts assessed above –e.g., that are hiding, that the liberalization is excessive, that the bonuses are extremely high, the loans irresponsible, the incentives wrong, that we are falling in consumerism or that we are lazy, egoistic or pragmatic– are traits of preferences that are irrelevant for economic analysis. However, as John Stuart Mill has highlighted, although the highly abstract character of political economy helps to understand economic affairs, given that life is complex, it often has little empirical relevance. Mill actually maintains that we have to consider other motives if we want to know the motives of real world facts. The description of the facts of the crisis indicates that we have to consider the moral dimension.

If women had run the financial world – wouldn’t we have faced this crisis? By Irene van Staveren.

In popular discussions on the moral dimensions of the financial crisis, there is sometimes reference to a gender dimension. A striking fact, for example, is that those responsible for the bankruptcy of the Iceland financial sector are all males, whereas those appointed to clean up the mess are women. Others refer to women’s more caring nature than men, as less predatory and hence less likely to get themselves into the highly competitive quarters of banking and financial trading. But what do we know about women and morality in economic behaviour?

In order to address just one dimension of this, I am in the process of finalizing public good experiments with male and female students in computer labs in The Netherlands. We try to find out not whether women behave at higher moral standards than men, but whether men and women believe that women behave more cooperatively than men. The literature on gender differences in experimental economics has already widely confirmed that women do behave more cooperatively than men and that women are more risk averse than men. These two results would suggest that more women in the financial sector may have led to less risky security packaging and less risky sales of mortgages and more win-win outcomes instead of predatory outcomes led by self-interested bankers and financial traders. Our question is whether the stronger cooperative attitude of women is recognized by both sexes and also leads to more cooperative outcomes of behaviour. Our preliminary findings, which are just based on one set of experiments and are currently being followed up by two more sets, are the following. First, we find that female subjects still behave more cooperatively than men, even when corrected for differences in risk aversion. Hence, their higher cooperativeness can not entirely be attributed to their lower risk taking than men. For the financial sector, this implies that when female bankers and traders just take as many risks as male traders they still go for more win-win results as compared to their male colleagues. Second, we find that women who are given the information that the other players are also female cooperate more than women and men who do not receive information about the sex of their partners. At the same time, we found that male players do not cooperate more when being informed that their partners are female. This may imply that when a sufficiently large number of women (at least a majority) dominates the financial world, behaviour may becomes less predatory and more cooperative, next to, on average, less risky. In a recent overview of gender differences in experimental economics, Rachel Croson and Uri Gneezy in the Journal of Economic Literature argue that women’s decisions are more context-specific than men’s. For example, they conclude from studies on the ultimatum game and the prisoner’s dilemma game that women’s decisions vary more with the gender of their partner than men’s decisions, indicating that also gender context is more influential for women as compared to men. But they offer no explanation why this would be the case.

Our explanation of the gender differences that we found in our public goods experiment is based on the literature in sociology, gender studies, and social psychology on gender beliefs. Gender beliefs can be defined as different interpretations and expectations about the personality traits (how women and men are) and behaviour (how women and men behave) of men and women. Moreover, gender beliefs are not only descriptive, but also prescriptive, stating how women and men should be and should behave. The differences in gender beliefs about men and women can be summarized around achievement-oriented traits for men – agentic traits – and service-oriented traits for women – communal traits. Both descriptive and prescriptive dimensions of gender beliefs contribute to individual self-definitions as masculine or feminine, and operate at the interpersonal level. Gender beliefs contribute to individuals’ definitions of their self-schemas, social identities, and self-evaluations and they operate in the interpersonal domain, defining the behaviours that are appropriate to various social contexts. The empirical literature on gender beliefs has widely demonstrated that both men and women hold gender beliefs. In particular, they both believe that men are more agentic and should behave more agentic than women, and that women are more communal and should behave more communal than men. Men tend to have st6ronger gender beliefs than women. Social dominance theory and expectation states theory state that because men tend to have on average a higher socio-economic status than women and they want to preserve that advantaged position, it is in their interest to hold on more strongly to traditional stereotypes about gender roles and traits compared to women. Status beliefs may even interact with gender beliefs so that even when individuals do not endorse dominant status beliefs, their recognition that these beliefs are widely shared will lead them to assume that others will treat them according to those beliefs, which will in turn affect their own behaviour in a stereotype way.

Gender beliefs are rather essentialist of character, in the sense that they change only very slowly and are often reproduced in new contexts, for example becoming attached to newly emerging jobs in the labour market. This resilience of gender beliefs may signal an evolutionary origin. The dominant evolutionary explanation is through sex selection theory, which holds that men are by nature more competitive because, having many sperm, they want to maximize their number of offspring, whereas women, having only a few eggs, are more cooperative so they seek to maximize the quality of their offspring. This would explain why males exhibit more dominance behaviour than females, both among animals and among humans, and they compete with each other for access to females. Moral gender differences, hence, seem to have an evolutionary origin. Recently, however, sex selection theory has received serious criticisms, within biology, psychology and the social sciences. Biologist Joan Roughgarden has shown internal inconsistencies in Darwin’s sexual selection theory and the adaptation of this theory in evolutionary psychology. She proposes instead social selection theory based on the need for both males and females to cooperate in order to ensure that offspring will be raised. Roughgarden presents a social selection theory through a cooperative bargaining game framework, showing that animals cooperate to rear (and not only produce) the largest number of offspring possible, because offspring are investments held in common between males and females. So, it is also in the interest of males to cooperate, even if they do not always do so for status reasons. A third critique on a sexual selection explanation of gender beliefs is provided by Shelly Taylor who, like Roughgarden, argues that sex differences originate from the need for cooperation, while recognizing that among primates this seems to be a stronger characteristic among females than males. She explains this difference, however, not through biology but through socialization of women into closer friendships and networks around food provisioning, childcare and defence against roaming young males, and the socialization of men into hierarchical groups which function best for tasks such as defence, attack and hunting. Therefore, Taylor argues, women tend to prefer to befriend other women and female friends have closer ties than male friends. Men’s groups therefore are more often threatened by power plays around dominance and control, Taylor argues, and one of the consequences of these power plays is the exclusion of young aggressive males from groups, who then start roaming around. This explanation of the origins of gender beliefs around agentic and communal traits points towards a social constructivist perspective, which holds that gender beliefs are produced in social and historical contexts rather than inherent to individuals’ sex.

The experiments that I and my co-authors are running do not allow us to distinguish between nature and nurture as explanations for gender beliefs. But the literature and our findings suggest that social context rather than biology seems to be a more convincing explanation. As indicated by Ridgeway, the interaction between status beliefs and gender beliefs through expectation status theory is especially likely in cooperative, goals-oriented contexts in which group status beliefs become salient. A public goods game centres around cooperation, a typical feminine trait according to general gender beliefs. Hence, the task in the experiment was not gender-neutral but positively linked to a feminine gender belief, which allowed for the expression of behaviour in relation to the intrapersonal level of gender beliefs: one’s own behaviour independently of others. The other context provided in the experiment was information about the sex of one’s partners, which allowed for the expression of behaviour in relation to the interpersonal level of gender beliefs: one’s behaviour in relation to one’s expectation of the behaviour of others. So, in our experiment we had a cooperative context (task), which is in line with a feminine gender belief, and a gender context provided as treatment variable (information that the other players are female or male). This experimental setting allows us to explain the results in terms of interpersonal gender beliefs and intrapersonal gender beliefs. On the first finding, that the female subjects behaved more cooperatively than men when corrected for differences in risk aversion, this can be explained by intra-personal gender beliefs. Female players believe that they are more cooperative than men, and hence they act more cooperatively than male players who believe that they are less cooperative than women. On the second finding, that women who are given the information that the other players are also female cooperate more than women and men who do not receive information about the sex of their partners, this can be explained by inter-personal gender beliefs. Female players will cooperate more when they are given the information that their partners are also female, because they are socialised into cooperation with other women. At the same time, we found that male players do not cooperate more when being informed that their partners are female. This can be explained on the one hand through socialisation: men have less personal experience with women’s stronger cooperativeness, and on the other hand through the interaction of gender beliefs and status beliefs, which lead men to reassert their higher status by not adopting stereotype feminine behaviour in interactions with women.

  In conclusion, our experiments on gender beliefs in a public good game do suggest that with a significant majority of women in the financial sector, some of the damaging behaviour that helps to explain the current financial crisis would likely to have occurred less than with the current male dominance in the financial sector. But this finding seems to be more a result of a social origin of gender differences in morality than of biological differences in the morality of men and women. The good news about this is that men can learn to behave more cooperatively, to take less excessive risks, and to attach less value to a competitively-defined type of masculinity. This may save us some financial crisis in future, but may also help to achieve more win-win outcomes in other sectors of our economy and society…