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The Eclipse Part Three – It’s Not Just Me!

I know.

I’ve been unfair.  Economists are not all totally irrelevant.  Nor is economics a complete wasteland of ridiculous models designed to make economists look clever at doing math. I hope I haven’t given that impression.

Well only a little.

You can’t make out-of-date ideas and concepts up-to-date and flashy simply by making them formal.  All you do is dress up the old and pretend it has continuing value.  A new coat of paint does not cure the dry rot.

Economists are obsessed over new coats of paint.

Perhaps the problem is that lacking any big new ideas there is a temptation to spend too much time on re-hashing the older ideas.  Then there is the even greater temptation to delve more deeply into self-reflection and ask ever less interesting questions in ll;.ieu of spending more time on the big issues.

To extend my metaphor: economists appear to enjoy discussing how to hold the paintbrush and spend inordinate time on the finer points of paint chemistry rather than tackling things like growth and inequality that have eluded them when they dared to think big.

Is it because things like growth and inequality require an inter-disciplinary approach?  

When economics narrowed itself and became the study of the allocation of scarce resources against a less scarce set of requirements it surrendered centrality in the discussion of those big questions.  They are not simply questions of allocation.  They are also social, political, ideological, and historical questions.  The problem for the reduced ambition that modern economics took on for itself was that those other influences still lingered in the background no matter how disciplined economists became in ignoring them.  Or in trying to ignore them.  Any economics that pretends that, as an example, power is irrelevant to the allocation of scarce resources is fooling itself.  It is deliberately making itself useless.  The insights might be wonderfully logical.  The mathematics might be the very essence of elegance.  But the relevance is diminished.  Often times to the point of irrelevance.

This has not stopped economists from popping up everywhere and claiming dominance over intellectual territory far beyond the domain of pure allocation.  They imagine that their method can be applied all over the place.  After all, they proclaim, they have conquered the art of efficient allocation.  Why not recapitulate every problem as one of allocation and conquer those too?

Except their triumph was made at the expense of reality.  And that matters.

We all know that this critique is correct.  Why else did economics re-imagine the larger questions through the limited lens of “micro foundations”?  It gave up thinking big.  It became so reductive that everything could be presented simply as a pile of little things.  There was no structure beyond that of the smallest element.  And that smallest element was all we needed to understand.   Because we could.  Or thought we could.  It was as if our understanding of the planets was an aggregation of our understanding of atoms.  There were no issues of interest beyond the small.  There cannot have been a bigger surrender of intellectual relevance or ambition than the inward turn implied by the micro foundations error.  This is why so many economists nowadays appear to be no more than statisticians manipulating large data sets and exploring new methods to apply to large data sets.  That sounds interesting.  But is it economics?

Yet economists still opine and portray themselves as experts on the bigger questions.  The recent bout of inflation brought them out in droves.  It became apparent quickly that there was no single perspective.  Had the public truly engaged with the economists it most likely would have walked away in confusion, and with a sense that economics has a long way to go before it can be relied on.  

The impression created by the endless public disagreements between well known economists is that economics is nothing much more than educated guesswork.  Its allocative focus disallows it from having insights into larger questions beyond those of any well briefed and educated person.  Yes it has its own jargon.  It has its own collection of approaches.  It has clever insights.  And it has, within its own world, an imperious sense of its own correctness.  But it has failed completely to grapple with its nemesis: the enormous and ever growing complexity of its core subject matter.  

Which is odd because at the beginning economics was proud to delve into the rising power and complexity of modern economies.  That’s what attracted people to study economies in the first place.  Economies were changing.  They were growing.  The issues thrown up by this change and growth were inherently absorbing and had an urgency associated with them.  There was great social value to be had in exploring the ramifications of the modernizing industrial world.  

But there was also a tension that ultimately led us to today’s irrelevance.  That was the tension between an urge to be “scientific” in the manner the hard sciences were developing, and an urge to maintain contact with the political and social consequences of modernity.  Economics attempted, at first, to keep a foot in both camps.  Ultimately, though, it had to choose.  It chose method, logic, and pseudo science.  It took on the appearance of objectivity despite its subject matter’s inherent subjectivity.  This gave rise to all sorts of references to “natural” phenomena. Natural rates of this and that popped up as if there were immutable laws governing social relations.  The two biggest movements in this direction were the so-called marginal revolution and the conception of general equilibrium.  Both are so hard wired into economics now that it is difficult to untangle them.  Yet both are artifacts of context and historical positioning.  They present a scientific worldview.   They exist on false foundations.  They are analytical crutches rather than real world artifacts in need to explication.  

General equilibrium in particular was useful because it implied that economies were essentially “Newtonian” and not subject to the complexities revealed by more modern physics.  Economics could, after all, be reduced to the study of static allocation.  There was no need to build a new foundation.  

And so economics continued on the trajectory we observe today.  It was inevitable.  As economies became more complex and richly interconnected, economics became more and more intensely focused on simplicity and reductive analysis in order to avoid embracing the need for a new method to engage with complexity.

The result was a surrender.  Macro economics rose and fell within a generation or two.  A bold effort to grapple with the big issues at a level that acknowledged the emergence of structure not explained by small scale thinking.  It failed primarily because it was essentially a return to political economy and the core of economics had been captured by the pseudo science of allocative logic.  

And then, of course, after World War Two economics became subject, as many things were, to the context of the geopolitics of the time.  America came to dominate western economics and those economists who claimed the most fame were those most amenable to the American side in that geopolitical struggle.  In a sense this influence took economics back to its origins as political economy, only now it was political economy dressed up without the politics being overt.  The scientific gloss hid the underlying ideology.  Which gave economics credibility and an ability to avoid reform even while economies accelerated in complexity and ran beyond their industrial roots and began their movement into a service and digital re-conception.  The gap between economics and real economies widened.  Irrelevance beckoned.

This is not new.  Nor is it unique.  

Just this week, as the professional classes bemoan the state of the world and the problems associated with slowing growth, persistent inflation, and what appears to be rotten geopolitics, we get a steady diet of references to the problems facing economics.

Martin Wolf’s reference in today’s Financial Times is, perhaps inadvertent.  He says:

“Marked declines in growth of real GDP per head have occurred across the world since the early years of this century.  The collapse in growth of “total factor productivity” — the best measure of productivity — has been particularly significant.”

Total factor productivity is a fancy name given to the ignorance that was discovered by Robert Solow back in the 1950s when he began theorizing about growth based upon the 1800s concepts of “labor” and “capital”.  Oddly, for economists, when they use two horribly vague notions — labor and capital in this case — they get horribly awful output from their models no matter how cleverly constructed those models are.  This discovery, one of the most important of that era, ought to have inspired a re-invention of economic inputs.  But rather than undertake that arduous task, economists simply re-branded their ignorance and gave it a fancy name.  Ignorance became Total Factor Productivity.  And here we are with a gnarled expert such as Martin Wolf commenting on its decline as if it was something that actually existed.  

It doesn’t.  It is a fog of underlying artifacts waiting to be revealed and then theorized in a modern way.  

Then there’s Jed Kolko, lately of government service, writing a long article outlining the agenda for economic research that he would have found useful in his policy-making role.  He says this:

“And having now seen this from the other side, more as a consumer than a producer of research, I can tell you that most academic research isn’t helpful for programmatic policymaking — and isn’t designed to be. I can, of course, only speak to the policy areas I worked on at Commerce, but I believe many policymakers would benefit enormously from research that addressed today’s most pressing policy problems.

But the structure of academia just isn’t set up to produce the kind of research many policymakers need. Instead, top academic journal editors and tenure committees reward research that pushes the boundaries of the discipline and makes new theoretical or empirical contributions. And most academic papers presume familiarity with the relevant academic literature, making it difficult for anyone outside of academia to make the best possible use of them.”

That’s a good encapsulation of my criticism:  economics has become, primarily, an academic pursuit designed not to tackle actual economic problems but to contribute to the development of economics itself and to create opportunities for career advancement for economists within the confines of academic economics.  It has, to channel Steve Levitt, become entirely self-regarding and self-respecting.  It values method over real world application and useful knowledge.  

Lastly, there’s another effort in the Financial Times.  This time yesterday by Andy Haldane who was, as you know, chief economist of the Bank of England.  His article concerns the “performance art” that forecasting has become for central bankers.  There is no way to gloss over the fact that forecasting in economics is an illusory pursuit sitting atop a Rube Goldberg structure of models each of which totters further from reality than that immediately below it.  Reading the output of this mess and making sense of it is more art than science.  It sounds profound dressed as it is in arcane jargon and addressed as it is to a small and knowledgeable audience all educated within the safety of the guild that has become modern economics.  He concludes thus:

“John Kenneth Galbraith famously said economics was extremely useful — as a method of employment for economists.  The same could be said of inflation forecasts and central bankers.  For all Bernanke’s sound analysis, forecasting is likely to remain interpretive dance — always mysterious, occasionally enlightening, a show without much tell.”

The relevance of that dance is, as the saying goes, in the eye of the beholder.  

The fall from grace of modern economics can be traced to a long series of bad decisions.  Its embrace of concepts that are not artifacts in the real world but are useful in modeling, led it down the road to irrelevance.  Its deliberate separation from the social origins of actual economies and their embedding in political and social reality allowed it to delve into what it imagined were natural laws, but which have little real world presence.  And its capitulation in the face of ever rising complexity — rather than embracing it — implied an ever growing gap between the simplicity needed to support its methods and the reality it purported to comment upon.  

And so we end up back with Steve Levitt and his critique.  Economics is fast becoming outdated, inward facing, and this irrelevant.  As Haldane witheringly concludes: “a show without much tell.”

I hope it recovers.  

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The Eclipse Part Two

Wow. Steve Levitt has really shaken me. I come not to mock, but to follow up …

Stand up and take a bow Ben Moll!  You daring soul.

Clearly I need to explain.

No sooner had I finished my comment on the irrelevancy of economics but I had confirmation — albeit unwittingly — in this morning’s Financial Times.  There on the editorial page was a short column by Soumaya Keynes talking about the rise of Hank.

For those of you not on the cutting edge, “Hank” stands for Heterogeneous Agent New Keynesian, as in a complicated model of the economy.  

Hank is a whole new way of looking at model economies, with the really big breakthrough being that it includes — roll the drums please — more than one household.

Yes, economists are moving at a rapid pace.  Their research has shown that the economy includes more than one household.

Gasp.

If you are a sociologist or anthropologist you are forgiven at this point for laughing out loud.  

Reflect, if you will, on the enormous hubris expressed by Steve Levitt when he criticized economics for becoming too inwardly focused and potentially irrelevant.  His condemnation was absolute.  He said that economics risked falling into the kind of disrepair that, in his mind at least, make sociology and anthropology laughingstocks.  Now, I don’t know sociology or anthropology all that well, but I imagine they don’t base a substantial amount of their theoretical effort on the notion that America has only one household.  Even if that household is “representative”. 

Representative of what?  Some Chicago-trained logician masquerading as an economist?

I digress.

Littered throughout the FT article are hints at why the absurdity of economics has persisted so long.  The word “simple” pops up, or is hinted at, several times.  

The older models, those with that one representative household, were simpler.  Why was this a good thing?  Because it made the math tractable.  And having tractable math was valued more than having models that might even vaguely resemble actual economies.  But as this effort ran into the difficulty represented by the complexity of the real economy, economists turned inward and focused more and more on microeconomics.   They left the big picture behind and made the absurd decision that the big picture was simply an aggregation of lots of micro pictures.  Micro-foundations became the new buzzword.

This of course must sound ridiculous to anyone who has encountered the consequences of the massive interconnections found daily within an actual economy.  But it was necessary too keep things simple.

Yes, I think I hear the sociologists and anthropologists chortling politely as they sip their morning coffee.  If they are irrelevant and in disrepair, what are we to say of a discipline that steadfastly ignores reality in its pursuit of ever more formality in its methods?

Speaking of which, this week’s award of the annual John Bates Clark Medal went to Phillip Strack.  Congratulations to him!  Well done.  A rising star is properly honored.  Here is the first paragraph from the American Economics Association announcement of the award:

Philipp Strack is a deeply creative and prolific microeconomic theorist whose research has enriched our understanding of economics on several fronts. Among his many accomplishments are (1) contributions to studies of decision-making and behavioral economics, particularly in dynamic context settings that involve learning and information transmission; (2) the formalization of ideas, such as information cost functions or notions of privacy, so that these concepts can be more fruitfully applied; and (3) the development of a new analytical approach to mechanism design. His work on (1) has challenged conventional wisdom and significantly pushed the boundaries of theories of decision-making and behavioral economics outward, and his work on (2) and (3) represent a new wave of the economics of information.

Read that carefully.  Our latest star is a micro guy.  He is being recognized for all sorts of things such as “studies in decisions making”, “mechanism design”, and “learning and information transmission”.  Micro. Narrow.  Presumably the behavior he is elucidating is of more than one household.  He’s obviously a very clever chap and I wish him well, but how that all helps society at large understand the economy as a whole is a little difficult to tease out.  I invite him to explain.

What seems to be clear, though, is that Levitt is right.  Economics, burdened by the complexity of the real economy, decided along the way to avoid that complexity and to go inward into its method and technique.  There were great rewards for being gifted modeler.  Whether the model made much sense in a real world setting slowly became less relevant.  Which meant that economics itself became less and less relevant.  It became more and more self regarding and self absorbed.

Which is why, possibly, people like Levitt can look at the other social sciences with such disgust.  When you become obsessed with the superiority of your technique rather than the relevance of your output you can easily slide into the sort of hubris that epitomizes the attitude economics has of itself.

In the background to all this is another factor that economists prefer us to avoid engaging.  Economics just isn’t very good at explaining the big things that go on in real economies.  It ranks right down there with sociology and anthropology.  Probably further down than those disciplines given the extravagant claims that economists have made through the years.  What is that saying about protesting too much?  This failure of macro thinking is another reason why so many economists sank into micro and why microeconomics came to be the place to play.  It’s a more made up playground than macro and is fertile ground for the aspiring mathematicians and logicians who clutter up the halls of academic economics. 

Comeuppance is due.  And the current disregard for economics, well earned that it is, has finally shown up in policy circles.  Neither Trump nor Biden uses academic economists much.  Politicians, like them or not, have to deal with real and not made up worlds.  I understand that until recently the lead economist in the Biden administration boasted a masters degree in public policy.  A far more relevant qualification than a PhD in micro whatever or something to do with representative households.

How low can you go?

But maybe the message is sinking in because the FT article hints, gently, at progress beneath the surface.  Not only do economists now recognize the possibility that America has more than one household — sociologists please be quiet — but there are other signs that the enormous damage done to the relevancy of economics by the likes of Lucas and his ilk is being shaken off.  

Inequality, for instance appears to be seeping into Hank.  I regard this as significant progress.  After all it is a feature of the real world.  Lucas, don’t forget, condemned the subject of inequality as being a major distraction to the study of “sound” economics.  The problem, though, as the article suggests, is that inequality has been sidelined for so long that the current generation of modelers now building their versions of Hank are having difficulty figuring out how to incorporate it.  Perhaps they need to spend more time with Gabriel Zucman, last year’s winner of the Clark medal, who writes a lot about inequality.  Or Branko MIlanovic whose icy dismissal of mainstream economics as being “Cold War” economics pretty much sums up where and why the discipline sank into its present state.  Economics was redesigned post World War II as an anti-state, anti-social, pathologically pro-market, and absurdly reductionist effort to bolster those American values associated with free enterprise, untrammeled capitalism, and the promotion of the very inequality that economists now seek to grapple with.

Whoops.

Maybe the household they modeled wasn’t vey representative after all.

And Ben Moll?

Daring soul that he is, Ben has suggested that perhaps, just maybe, and if you squint really hard, the totally ridiculous notion of rational expectations needs to be tossed overboard.  Apparently Ben has spent some time with his family and noticed that they don’t carry around in their heads complete information about every darned thing coupled with the computational capacity to make instantaneous adjustments to every move that everyone else makes.  Oh, and periodically they forget things, change their minds and generally behave very … well not quite rationally.  This shocking discovery has motivated Ben to argue that Hank ought not be based on all seeing and all knowing rational actors.  Something more akin to humans might be in order.

Please … anthropologists be quiet!

So there is hope.  The current malaise might be cured by Hank.  Although Soumaya Keynes let slip her cynicism at the end of her article when she says:

“In highlighting the power of fiscal policy and the importance of inequality, a cynical assessment of the Hank boom is that it is merely bringing the theory of macroeconomics up to speed with its practice.  Even if there is some way to go, it is a move in there right direction.”

You could also suggest, possibly impolitely, that the Hank boom is simply an effort to shed the waste and destruction of the last fifty to sixty years of theorizing.  Getting rid of the illusions, delusions, and outright errors of a generation or two of economists obsessed with the glitter of their own self-proclaimed cleverness, along with the arrogance the led economists to denigrate the less formal social sciences, seems like a good thing.  Cathartic almost.  It might even make economics relevant.

Make economics relevant again.  Now there’s a slogan to rally behind.  

It might even aspire to the stature of sociology or anthropology.  That’s a goal to shoot for.

Isn’t it?

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The Eclipse of Economics?

Steve Levitt is moving on.  Is it an eclipse?  Which gets me to …

I have a use for all those used special glasses we Americans just acquired en masse.  The ones that allowed us to look at the sun during its eclipse.  We can recycle them — there will be more eclipses soon.

Or we could use them to study economics.

Trying to pin down the natural rate of something in economics can be the equivalent of burning your eyes looking at the sun.  There’s just too much glare.  And economics is just chock full of natural stuff.  It has laws upon laws many of which seem to have natural outcomes.  Or at least outcomes that are totally and incontrovertibly correct.  So say the economists.  Just don’t look up to see if they are correct.

Let’s begin at the beginning.

Well done astronomers!  You got that one right.  I was told that I would witness an eclipse here in Vermont, and I did.  Your theories led to predictions and those predictions led to observations.  Even by a total ignoramus like me.  And the thousands of others who jammed the roads of Vermont to get a sight of the eclipse.  It seems that the elegance of the underlying math in physics leads, at least in this instance, to something we can all witness.  We don’t need to make big extenuating assumptions or embarrassingly silly explanations in order to see an eclipse take place exactly when it was predicted.  It just happens.  Wow!

That restores my faith in science

Which is good because economics had totally undermined it.

Physics is highly relevant.  It explains real stuff.  

Economics is not relevant.  It explains only made up stuff.

Which is only useful if you are wearing magical glasses.  The kind that blinds the sight of economists.

I am being harsh.  I know.  There is a ton of clever stuff in the attic of economics.  Ideas that have some use and have a certain logic to them.  They look great.  Just don’t try to watch the economy and wait for the equivalent of an eclipse.  You might wait a while.

An equilibrium for instance.  Wait for it … 

Well you missed it.  It was there, I am told, but it evaporated too quickly for you to realize it was there.  You should have been wearing those glasses.  Only if you wear the economists’s special glasses can you witness the presence of the objects they discuss.  The natural rate of this.  The natural rate of that.  General equilibrium.  Special equilibrium.  And so on.  All these artifacts so well described by economists.  They pass us by every day.  Honestly.  

Just wear those glasses!

This is simply not fair.

We all know that an economy is vastly more complex than the universe.  There’s a lot going on.  Some people call it life.  And life’s difficult to get your arms around.  There are people, for instance, and we all know how difficult people can be.  They have preferences for things.  And just when you’ve modeled what happens when you mix all those preferences together, they go and change them.  How inconsiderate!  So let’s hold them constant.  Let’s make the earth the center of the solar system while we’re at it.  That makes life easier to calculate.  No?

Even better.  What happens to people when we squeeze the life out of them?

Yes!  Now we can model them just like astronomers can model the sun and moon.  We can predict our versions of an eclipse.   Automatons are so much more simple to manage within our math.  And we are totally committed to our math.  So when we have to choose between people and math, we choose math very time.  We so want to match the astronomers!

I know.  I know.  There’s nothing new here.  Nothing at all.

Which is the point.

A couple of days after the vindication of physics, we are left gasping at the problems economics has in trying to make itself relevant to the real world.  

Just look at the fuss over inflation and interest rates.  What is the “right” level for interest rates?  Do the math.  And … well it’s sort of this.  Or that.  It depends.  

And, why don’t the “markets”, whatever they are, already know?  Don’t they have perfect information?  About the future, the past, and the present?  Of course not.  That’s just a ruse.  It’s just a trick to get the math to work.  No one believes it.  So why would we believe economists?  They make stuff up.  Just to make their work less difficult.

Okay.  Let’s cut to the quick.

Nothing I have said surprises any of you.  So, I repeat: why would anyone pay attention to economists?

Apparently this has just hit home to Steve Levitt of all people.  He of “Freakonomics” fame.  He is leaving Chicago.  Good for him.  But it’s his reasoning on the way out that is a little eye catching.  He gave a long interview to someone who publishes a podcast on contemporary economics.  

Here are a couple of snippets from the conversation — it’s a transcript, so forgive the language.    

“… I just think about all these ideas that had so much impact. I wonder now, just like with so many researchers, to what degree they’re still low-hanging. I think it just gets harder and harder, I think, at some level, to be able to innovate. And so, the bar just keeps on being higher. But at the same rate, I wonder, too, if the marginal impact of an academic is perhaps declining sort of in the same respect that Bob Gordon and people like that argue that we’re running out of ideas and that we’ve already invented all the great inventions, … “

And

“…I think the profession is very inward-looking. It’s rewarding people who do things that are seen as hard. It’s really blurring the lines between theory and empirics was structural in a way that it is an experiment that I personally don’t think has worked out very well. And so, I think that it’s not that, I mean, the great ideas you’re talking about like black souls are few and far between anyway. But the rewards are not there for people who have practical insights are not rewarded greatly in the profession. The rewards come to people who make innovations, theoretical innovations, right? Who come up with new techniques, who do hard stuff that other people can’t do. So, I think in that sense, economics is going to become, my prediction is that economics is going to become less and less relevant, more and more inwardly focused. And honestly, I wouldn’t be that surprised if economics ends up going the way of anthropology or sociology, which works prominent and thought to be very promising and important disciplines, but have fallen dramatically in their stature because they ended up being more arcane and more focused inwardly. So, I have a really bad feeling about the future of economics, and I don’t see an easy way to change it.”

You can listen to the entire podcast here: https://newbooksnetwork.com/stevendlevitt

As far as I can tell, Levitt is pretty sure economics has become so inwardly focused that it is fast becoming irrelevant.  At this pace it will, gasp, join sociology and anthropology on the dust heap of useless academic exercises soon.  There are plenty of useless academic exercises, but I think that’s being harsh on sociology and anthropology.  At least when they make stuff up they don’t advertise it to the world with the kind of arrogance that economics has displayed for decades.

Despite it’s failures.

The really amusing part of the Levitt story is that he was once criticized by James Heckman of not doing “proper” economics.  Whatever that is.  “Proper”?  Who knows?

It reminds me of the total lack of coherence I have remarked on before.  Let me illustrate:

Here’s Thomas Philippon beginning his book “The Great Reversal” by saying:

“The big debates in economics are about growth and inequality.  As economists, we seek to understand how and why countries grow and how they divide income among their citizens.

This is not exactly true because in 2004 Robert Lucas said this:

“Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution… The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.”

So, what is “sound”  economics?  Is it like Heckman’s “proper” economics?  Can it predict an eclipse?  Accurately? And without the prop of absurd assumptions?  Can it?

No it can’t.  

I love the pomposity of the Lucas comment.  I would have thought that “sound” economics would be the sort that establishes how and why we experience economic growth.  That seems to be a big deal for economists to figure out.  Kind of like predicting an eclipse.  

But, no.  Even after decades of trying and after a vast pile of technical mumbo jumbo economists can’t answer that question.  They are left with a wide and deep set of ideas.  With no clear single theory that allows us to say with clarity what is likely to happen over the next few years let alone decades.  Halley’s comet this is not.  

They did, however, “discover” something they call Total Factor Productivity.  Scratch the surface of that glittery idea though and you learn that it is the part of growth that their models can’t explain.  Models based, that is, on their traditional method and classification of economic resources.  

Yes.  They re-branded something they can’t explain, gave it a fancy name, and announced its “discovery” as progress.  Backwards progress.  But progress nonetheless. And no eclipse either.  Nothing to see after all that work.

They will naturally object to my flippancy.  They should.  Just as I should remind them of 2007.  

Oh that!

Economics was rightly chastised for missing that one.  And, before you all get upset, I am fully aware that not everyone missed it.  Which is the point.  Is economics a science or simply a great big conversation out of which nothing comes?  Dare I remind you of sociology and anthropology? Can you imagine a physics that has several competing theories along with various versions of when an eclipse will take place?  

Don’t laugh.  That’s where economics is.

When you think about it 2007 was as if an eclipse occurred and took astronomers by surprise.  My goodness! They might have said.  Did you see that?  How did that happen?  Our models, ever so clever that they are, didn’t predict that!  Ah, but we are not in the business of predictions.  We are simply trying to explain.  That’s where their voices might drift off towards silence … explain what?

Astronomers, though, can both explain and predict.

Economists can’t.

Their voices do drift off almost immediately.  Or they get indignant.  Don’t you understand, they proclaim, just how complex an economy is?  All that astronomy is easy by comparison.

I suppose that’s where I began.

Agreeing with Levitt.  Economics is irrelevant.  That is if you want to understand actual economies.

“Proper” or not. “Sound” or not.  It just seems irrelevant.  

Maybe it’s the economists themselves.  They’re so steeped in their method that they can no longer change.  There’s no way forward.  So they dig down.  Down and deeper into the intricacies of their method.  They disappear into irrelevancy. They are locked in.  They are stuck way up a fitness peak.  They are so path dependent.  See?  Complexity is chock full of ideas that might help explain the problem.  If only economists would adopt some new ideas.  Yes.  An economy is complex.  So think in terms of complexity and don’t simplify the economy out of existence in order to explain it.

And, yet again I say, I know.  There are a few brave souls trying to bring economics within the scope of complexity.  Good luck to them.  

In the meantime, as Clara Mattei and Aditya Singh have recently claimed maybe it’s time to save economics from economists.

And maybe Levitt that arch practitioner of micro jumbo leaving is a sign or progress.

We can always hope.

Meanwhile put those glasses away.  The eclipse has come and gone.  Just like the astronomers said it would.  

Now there’s a proper science.  Maybe Heckman should take notes.

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The Trouble with Words

Words are not ideas.  They are our means to capture ideas and make them tangible.  The problem is that words are a porous net that inevitably lets some accuracy slip away, but sometimes captures irrelevant detail that shines brightly in the moment and then dulls in the light of later thought.

Trying to define something so a discussion can follow without ambiguity in meaning sliding in and muddying things.  Slippery isn’t it?

How about this:

“I sometimes wish we could take the energy expended on these antimacassar hand-me-down “rules” and apply it to working out a way to use awkwardly broad words like inclusion, equity, liberty and racism more clearly. The ever-evolving meanings of these words has a way of creating genuine misunderstandings — try defining “neoliberalism” — to the point of actually impeding communication.”

That’s John McWhorter in the New York Times a couple of days ago.  He teaches linguistics.  

Try defining “neoliberalism”?

He’s been chatting to much with his fellow academics in the economics department.  They are the last people to ask.  Neoliberalism is easy to define.  It’s just that its definition keeps offending people who want to be neoliberal without having the recent taint associated with it rub off on them.  Or, at least that’s my opinion. 

And when I say neoliberal is easy to define I must remind you that it is a term used most often in discussions about the political-economy of the past forty to fifty years.  It is Reaganism.  It is Thatcherism.  It is Friedman.  It is Hayek.  It is all of the above and the various hangers-on who sought to destroy, or at least denigrate, anything social.  After all, as we have been reminded incessantly, social is one step away from tyranny.  I think “serfdom” is a word used somewhere to help us all understand the perils of social.

Academics, of course, love specificity.  They, like all technocrats, live in a world of precision bordering on the absurd.  They love argument over the finest of differences.   Whole careers can be made or destroyed by the finer parsing of something that previously had been commonplace, but imprecise.  

I am being harsh.  The problem is that technocrats adore the constant division of knowledge into ever smaller nooks and crannies.  They burrow into ever smaller divides and make themselves at home by substituting depth for breadth.  Anything that doesn’t fit within their enclave is tossed overboard presumably to land in someone else’s.  

And yet …

Economists are really terrible at definitions.  What, for instance is “labor”?  You might find it odd for something as central as labor — central that is to economic theory-making — could be so ill defined.

What, exactly is it?

All you have to do to understand the importance of this problem of definition is to spend some time loitering about in the abundance of literature concerning growth.

Theories of growth are central to the discipline of economics.  From the general perspective, having our technocrats come up with a good theory of growth, one that fits history and helps us navigate how to approach the future, seems to be a crucial element of the social value of economics.  It is certainly something that has exercised many of the best economists through the years.  From the earliest to the most recent ideas all sorts of reasons have been given for the explosion of activity that accumulated as growth since sometime a couple of hundred years ago.

And at the heart of most of those ideas is something called labor.

What is it?

Well, we are told, it sits alongside some other thing called “capital” as a primary factor in propelling us ever upward in our accumulation.  I wonder what economists mean by these two words.  Exactly.  They pride themselves in the elegance of their logic and mathematics.  They love expressing themselves in various formulaic combinations of quantities and so on.  But they insist on using words like labor to define those quantities.  

What, exactly, is a quantity of labor?

Instead of stopping and drilling into what this might be, we are asked to glide past and watch the virtuoso manipulation of it in various theoretical discussions of growth.

It’s as if fog can be cleared by representing it in a formula.  It can get a bit tiring looking through the murkiness all the while being told that things are crystal clear.  

I give Solow credit for being honest though.  Using imprecise terms will always produce unexplained or vague results.  In his case it produced a residual in his calculations that someone else called  a measure of our ignorance.  Others subsequently slapped a professional sounding name on this ignorance and called it “Total Factor Productivity” as if giving it a name made it somehow more precise.  

This measure of ignorance is really simply the way in which analysis, no matter how clever it looks, can be misleading when it is rooted in imprecision.  Not that it is avoidable.  Labor will always be elusive.  It is a melange of characteristics each of which has more or less importance depending on the objective of the analysis.  Is it skill?  Technique?  Energy?  Effort?  Simply a group of people?  A workforce?  The list goes on.  

It’s all of the above.  Which is why absurdities like total factor productivity exist to mask the abundance of choice in its definition.  

The point being, I suppose, that economists are doomed to exist in a world lacking precision.  They seek to explain certain social activity and its outcomes by using a toolkit that hides their roots in the vagueness that all social activity begins with.  Our language.  No matter how hard we try we are stuck with words like labor that might appear to have clarity at any particular moment, but which slide into the shadows when pressed into service inside the workings of mathematical manipulation.  The technique demands accuracy that language cannot provide.

Isn’t that the reason why economists slid into mathematics in the first place?  To avoid the sloppiness of language?  And yet, in order to stay connected with their basic material they had to retain its essential vagueness.  Capital and labor.  Two horribly imprecise concepts whenever you try to pin them down.  Wonderful at a high level.  Awful at any level of detail.  Hence residuals.

Which is why I get so annoyed when critics argue that we ought not discuss neoliberalism because it lacks definition.  Nonsense.  It has as much precision as labor or capital.  If not more.  Economics exists, like it or not, deep in the world of language rather than within the purity of mathematics.  Its roots are social as much as physical.  Trying to ignore that is a mistake.  And one constant downside of existing in a social domain is that words and communication dominate, and infect, our analytical capacity.  

The pretense of economics is that it has managed, somehow, to remove itself into a more precise world where its various techniques have a rigor lacking in language.  Which is a doomed enterprise.  It hasn’t.  Solow’s residual bears witness to that failure.  So while economists might expound on topics such as growth, and they might imagine they have mastered the details of its workings, they haven’t.  

Their conversation continues.  In words.

Meanwhile, I think neoliberalism is a fine and mightily accurate concept.

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Neoliberal Angst?

I wonder why it is that neoliberals so reject the label we have given them.  Is it because they’e embarrassed?  I don’t think so.  They all seem very proud of their attachment to the old order.  Every so often one of them will surface and proclaim bitterly that they are misunderstood and they they don’t deserve the opprobrium piled on them by those nasty “leftists” who want to sully the pristine reputations of people like Mises and Hayek.  Poor dears.  Are we to feel sympathy for a group of thinkers who, collectively, opened the door to regression and decline?  All in the name of some misty eyed nostalgia for ideas that had been overwhelmed by history in the early part of the twentieth century? 

I recently came across this problem at a much narrower and personal level.  A correspondent engaged in an short investigation into what neoliberalism is and determined that  “there is no single definition”.  It is thus a meaningless concept.

No it isn’t.

But why do proponents of neoliberal ideas have to take this tack?  Why is it necessary for them to go underground and conduct an anonymous campaign rather than defend neoliberalism from behind the recognizable ramparts its originators erected for themselves?  Why do the relish the notion of being underdogs engaged in a struggle against the oppression of government and tyranny?

Because neoliberalism failed.

The enterprise that Mises, Hayek, and the others pursued was the undoing of the progress made in the first decades of the twentieth century towards a more democratic and less rigid, inflexible, and inhuman conception of our political economy.  The real anathema to the neoliberals was the mitigation of the outcomes of laissez-faire capitalism by the injection of democratic ideas into the mix of social governance.  That mitigation was seen as an occlusion of “liberty”.  So something like the New Deal here in America was cast by neoliberal thinkers as the first ugly step on the road to serfdom.  That it appeared to be popular and that it worked as a policy set in the depths of depression were of no consequence.  

Popularity was seen as the dead hand of ignorance.  How could ordinary voters, riven through as they are with narrow self-interest and lack of awareness, possibly be relied upon to see the benefits of economic liberty?  Especially economic liberty for the wealthy folk and large corporations whose generosity supported the academic work of the early neoliberals.  No.  Popularity was a bad thing.  Very bad.  As expressed in democracy it was particularly bad.  Being opposed to democratic governance became a feature of neoliberals.  They didn’t emphasize it too much because of the obvious ramifications — they were in a minority, especially during the Cold War when America was loudly proclaiming the virtues of democracy hither and yon.  Being anti-democratic in an era of burgeoning democracy is not, dare I say it, popular.  Which is, perhaps, why neoliberals cast themselves as defenders of freedom instead of democracy.  It keeps them within the framework of American ideology.  

Policy is another matter.  Keynesian ideas seemed to work.  This was even more anathema to the neoliberals who proselytize the efficacy of pure market solutions to every problem known to mankind.  Interference in “the market”, whatever that is, is pure tyranny.  It is also a restriction on the liberties of the wealthy and large corporations whose generosity supported the academic work of the early neoliberals — sorry: I am repeating myself.  That slippery slope towards serfdom has many entrances.  Neoliberals are stalwart in their ability to identify and defend against the foul contamination of the free market by the evil forces of the state.  Especially, it turns out, in democracies. 

Perhaps the sensitivity of the neoliberals to being so-called is that they want simply to be “liberals”.  Their problem being that the word liberal has many interpretations, as is, perhaps, normal for an idea that has been in current in politics for so long.  Meanings mutate as context changes.  Meanings mutate as different minds wrap themselves around an idea and bend it to a particular circumstance.  

Liberalism has always been a contentious idea.

The literature is replete with both adoration and scorn of liberality.  It is a hydra like concept.  And its various strands are inconsistent.  Indeed, they often contradict themselves.  The issue is that each step along the road towards liberality limits the scope of the prior steps.  So the first gains in civic justice were limited by the expansion of political justice.  That’s where the neoliberal hatred of democracy begins.  How can someone be free and then have to give up some of that freedom within a commonweal?  And if that community is expressed through the construct of the state, how is that different from the oppression of authority under the ancient systems that civic justice was supposed to eliminate?

Even more recently the progress towards political justice has been, itself, limited by the search for social justice.  Liberalism has introduced into itself another limitation.  Equalities of various sorts appear to contradict what appeared to be earlier achievements.  

There’s no need to explicate this progression here other than to note that those who gained from the first steps towards liberality have seen those gains reduced subsequently as others claimed their own right to progress.  Neoliberals are defending the early gainers against the later followers.  They cast themselves as in possession of an absolute definition of liberality when, in fact, they represent a moment in time.  Their beliefs are contingent on a social and political arrangement that subsequent liberal moments have rendered obsolete.  Their purity implies a negation of that subsequent history.

There’s nothing wrong, of course, with representing the past.  There is virtue in all of us remembering the route we have taken.  There was an awful lot of hard work and blood spilled along the path we have taken into modernity.  The project is not yet complete, as the current battles over social justice demonstrate.  Liberalism is not a static idea.  It twists and bends as contexts change.  As it always has.  

And some of its offshoots are left behind as failed experiments.  There is, within the urge towards liberality, always the complication that when it fails it leads us back to subjugation.  Regression is as likely as progression when we lose the sense of balance needed to build upon past progress rather than uproot it.  We are, I think, in such a moment.  

Which is why confronting the neoliberals is essential.  Their definition and beliefs are not liberal in today’s context.  They fail to account for the rise of popular self-governance which they still see through the lens of the inter-war chaos that so distorted the views of both Mises and Hayek.  Inter-war Austria was hardly an archetype of modern democracy, and yet both of those early neoliberals used its chaos as demonstrative of the inevitability of regression in the face of popular self-governance.  They thus utterly failed to adapt to modern democracy.  Modern libertarians remain stuck in that same intellectual space.  

On consequence of this inability to progress is the narrative that neoliberals have had to create to explain the origins of “the market”.  In their telling markets are natural phenomenon.  They can only be restricted and not enabled by the state.  History tells us otherwise.  But to side with history is to align with the state as a beneficial and not malign actor.

This is, perhaps, our biggest problem of engagement with neoliberals.  Not only are they defending an anachronistic view of society — one long swept away by the very forces they so adore, after all the division of labor is now so extensive that the consequent complexity has eliminated the possibility of simple interpretations of “the market”.  But they are reduced to defending, through denial of its existence, the power and status of this who benefitted from the early achievements of liberality.  They have to tolerate the concentration of political and economic power because to argue otherwise introduces the state as a distributive agent.  

Did I mention the gratitude of their wealthy and large corporate supporters?

So we arrive at the apparent upset that defenders of neoliberalism have when called neoliberal.    They call the word an epithet hurled at them by, gasp, leftists who want to restrict freedom and do all sorts of harm to the liberties attributed to “free markets”.  

But, there never were such free markets.  So there never were the associated liberties.  

And that is their underlying problem.

Nostalgia is often a veil over an illusion.  Our memories fail us too often.  The trajectory of what Balibar has called, aptly, “equaliberty” is a difficult one.  Liberty in the neoliberal sense emerged first from the old order because it was something that a rising newly powerful group sought.  They carved it out from the old way of life to their own benefit.  The equality part that has been fought over since, and which the neoliberals attempt to disparage and reduce, is a natural consequence of that first step.  It implies a struggle for power between that first liberated power group and those who want to follow in its footsteps.  

Neoliberalism is an entirely appropriate word to describe the effort to prevent that second step. Neoliberals are dedicated the the jealous guardianship of the power amassed by the first to achieve liberty.  No wonder they see power-sharing as tyranny.  Their entire intellectual edifice is a construct to preserve power within a constrained group.  

That they reject such an interpretation of their efforts as being a leftist epithet simply means that they feel vulnerable.  Of course they do.  Their project has been exposed over the past few decades as a power grab by the wealthy and large corporations who generously support their academic work.   How hard is it for neoliberals too understand the term “follow the money”?

Isn’t following money something they applaud?  Are they damned by their own ideas?

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